UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 WASHINGTON,
D.C. 20549


−−−−−−−−−−−


FORM
10-K


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





FOR
THE FISCAL YEAR ENDED:   MARCH 31, 2008


OR


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





Commission
file number 0-18265.


−−−−−−−−−−−


COMMUNITY
FINANCIAL CORPORATION


(Exact
Name of Registrant as Specified in its Charter)





Virginia
            
            54-1532044(State
      or other jurisdiction of
              incorporation
      or organization)
            
            (I.R.S.
      Employer
              Identification
      No.)38
      North Central Avenue, Staunton, Virginia
            
            24401(Address
      of principal executive offices)
            
            (Zip
      Code)







Registrant’s
telephone number:  (540) 886-0796




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




Common Stock, par value $.01
      per share
            
            NASDAQ Capital
      MarketTitle of
      Class
            
            (Name of each exchange on which
      registered)




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




Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.    Yes [  
] No
[X]




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.   Yes [  
] No  [X]




Indicate by check mark whether the
Registrant (1) has filed all reports required to be filed by Section 13 or 15(d)
of the Securities Exchange Act of 1934 during the past twelve months (or for
such shorter period that the Registrant  was required to file such
reports), and (2) has been subject to such requirements for the past 90
days.  [X]Yes    No
[   ]




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [X]




Indicate
by checkmark whether the Registrant is a large accelerated filer, an accelerated
filer,  a non-accelerated filer, or a smaller reporting
company.




Large accelerated filer [  
]                                                                                                 Accelerated
filer  [   ]




Non-accelerated filer (Do not check if
a smaller reporting company)  [   ]   Smaller reporting companyX




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes      No X




As of May
31, 2008, there were issued and outstanding 4,343,358 shares of the Registrant’s
common stock. The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the Registrant, computed by reference to the
price at which the common equity was last sold as of September 30, 2007, was
approximately $40.0 million.  (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 Registrant.)




DOCUMENTS
INCORPORATED BY REFERENCE




PART III
of Form 10-K—Portions of the Proxy Statement for the 2008 Annual Meeting of
Stockholders.










TABLE
OF CONTENTS




PageCAUTIONARY
      STATEMENT REGARDING FORWARDING LOOKING STATEMENTS
              1PART
      I
              2Item
      1.  Business
              2General
              2Our
      Operating Strategy
              2Lending
      Activities
              3Loan
      Originations
              11Asset
      Quality
              12Investment
      Activities
              17Sources
      of Funds
              18Borrowings
              21Subsidiary
      Activities
              22Competition
              22Regulation
              23Federal
      and State Taxation
              27Executive
      Officers
              28Employees
              28ITEM  1A.  UNRESOLVED
      STAFF COMMENTS
              28Item  2.  Properties
              29Item
      3.  Legal Proceedings
              30Item
      4.  Submission of Matters to a Vote of Security
      Holders
              30PART
      II
              30Item
      5.  Market for Registrant’s Common Equity, Related
      StockholderMatters
      and  Issuer Purchases of Equity Securities
              30Item
      6.  SELECTED FINANCIAL DATA
              32Item
      7. Management’s Discussion and Analysis of Financial
    Conditionand
      Results of OperationS
              33Executive
      Overview
              33Critical
      Accounting Policies
              34Asset/Liability
      Management
              35Average
      Balances, Interest Rates and Yields
              37Rate/Volume
      Analysis
              38Financial
      Condition
              38Results
      of Operations
              39Liquidity
      and Capital Resources
              42Contractual
      Obligations and Off-Balance Sheet Arrangements
              42Impact
      of Inflation and Changing Prices
              43Recent
      Accounting Pronouncements
              43Item
      7A. Quantitative and Qualitative Disclosures About Market
    Risk
              43Item
      8.  Financial Statements and Supplementary Data
              44Index
      to Financial Statements
              44Report
      of Independent Registered Public Accounting Firm
              45Consolidated
      Balance Sheets at March 31, 2008 and 2007
              46
    ii
     Consolidated
      Statements of Income for the yearsended
      March 31, 2008, 2007 and 2006
              47Consolidated
      Statements of Stockholders’ Equity for the years ended March 31,
      2008,2007
      and 2006
              49Consolidated
      Statements of Cash Flows for the years ended March 31, 2008, 2007 and
      2006
              50Summary
      of Accounting Policies
              52Notes
      to Consolidated Financial Statements
              60Item
      9.Changes in and Disagreements with Accountants on
    Accountingand
      Financial Disclosure
              90Item
      9A.  Controls and Procedures
              90Item
      9B.  Other Information
              91PART
      III
              91Item
      10.  Directors, Executive Officers AND CORPORATE
      GOVERANCE
              91Item
      11.  Executive Compensation
              91Item
      12.  Security Ownership of Certain Beneficial Owners and
      Managementand
      Related Stockholder Matters
              92Item
      13.  Certain Relationships, Related Transactions AND DIRECTOR
      INDEPENDENCE
              92Item
      14. Principal AccountING Fees and Services
              92PART
      IV
              92Item
      15. Exhibits, Financial Statement Schedules
              92SIGNATURES
              93INDEX
      TO EXHIBITS
              94









iii


CAUTIONARY
STATEMENT REGARDING FORWARDING LOOKING STATEMENTS




This
document, including information incorporated by reference, contains, and future
filings by Community Financial Corporation on Form 10-K, Form 10-Q and Form 8-K
and future oral and written statements by Community Financial Corporation and
its management may contain, forward-looking statements about Community Financial
Corporation 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, including revenue creation, lending origination,
operating efficiencies, loan sales, charge-offs and loan loss provisions, growth
opportunities, interest rates, cost savings and funding advantages. These
forward-looking statements are based on currently available competitive,
financial and economic data and management's views and assumptions regarding
future events. These forward-looking statements are inherently uncertain and
investors must recognize that actual results may differ from those expressed or
implied in the forward-looking statements. Accordingly, Community Financial
Corporation cautions readers not to place undue reliance on any forward-looking
statements.




Words
such as may, could, should, would, believe, anticipate, estimate, expect,
intend, plan and similar expressions are intended to identify these
forward-looking statements. The important factors discussed below, as well as
other factors discussed elsewhere in this document and factors identified in our
filings with the Securities and Exchange Commission 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. Among the factors that could cause our actual results to differ
from these forward-looking statements are:




·
            the
      strength of the United States economy in general and the strength of the
      local economies in which we conduct our operations; general economic
      conditions, either nationally or regionally, may be less favorable than
      expected, resulting in, among other things, a deterioration in the credit
      quality of our loans and other
assets;




·
            the
      effects of, and changes in, trade, monetary and fiscal policies and laws,
      including interest rate policies of the Board of Governors of the Federal
      Reserve System;




·
            financial
      market, monetary and interest rate fluctuations, particularly the relative
      relationship of short-term interest rates to long-term interest
      rates;




·
            the
      timely development of and acceptance of new products and services of
      Community Financial Corporation and 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
      impact of changes in financial services laws and regulations (including
      laws concerning taxes, accounting standards, banking, securities and
      insurance); legislative or regulatory changes may adversely affect the
      business in which we are engaged;




·
            the
      impact of technological changes;




·
            changes
      in consumer spending and saving habits;
and




·
            our
      success at managing the risks involved in the
  foregoing.




We do not
intend to update our forward-looking information and statements, whether written
or oral, to reflect change.  All forward-looking statements
attributable to us are expressly qualified by these cautionary
statements.






1






PART
I




ITEM
1.  BUSINESS




General




Community
Financial Corporation is a Virginia corporation, which owns Community
Bank.  Community Bank was organized in 1928 as a Virginia-chartered
building and loan association, converted to a federally-chartered savings and
loan association in 1955 and to a federally-chartered savings bank in
1983.  In 1988, Community Bank converted to the stock form of
organization through the sale and issuance of shares of our common
stock.  References in this document to we, us, our, the Corporation,
the Company and the Bank refer to Community Financial and/or Community Bank as
the context 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.”




Community
Financial Corporation and Community Bank are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision,
Department of the Treasury and by the Federal Deposit Insurance
Corporation.  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 to the maximum extent permitted by the
Federal Deposit Insurance Corporation. At March 31, 2008, Community had $491.2
million in assets, deposits of $350.7 million and stockholders' equity of $38.7
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, Raphine,
Verona, Lexington, Harrisonburg and Virginia Beach, Virginia.




Like all
financial institutions Community Bank’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
Office of Thrift Supervision 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.  This annual report on Form 10-K,
as well as other public information that we file with the Securities and
Exchange Commission, is also available on our website at www.cbnk.com and on the
Securities and Exchange Commission’s website at www.sec.gov.




Our
Operating Strategy




Our goal
is to operate and grow a profitable community-oriented financial institution,
and to maximize stockholder value by:




·
            retaining
      our community-oriented focus to meet the financial needs of the
      communities we serve;




·
            enhancing
      our focus on core deposits, including savings and checking
      accounts;




·
            maintaining
      a high level of asset quality.




·
            selectively
      emphasizing products and services to provide diversification of revenue
      sources and to capture our customer’s full relationship.  We
      intend to continue to expand our business by cross selling our loan and
      deposit products and services to our
customers;








2








·
            growing
      and diversifying our loan portfolio by emphasizing the origination of
      commercial and multi-family real estate loans, one- to four-family
      residential mortgage loans, construction loans, secured business loans and
      consumer loans;




·
            expanding
      our banking network by opening de novo branches and by selectively
      acquiring branch offices, although currently we do not have any specific
      expansion plans;




·
            controlling
      operating expenses while continuing to provide quality personal service to
      our customers;




·
            utilizing
      borrowings as needed to fund growth and enhance profitability;
      and




Lending
Activities




General.  We
concentrate our lending activities on first mortgage conventional loans secured
by residential properties, commercial and multi-family real estate with an
emphasis on multi-family housing,  and to a lesser extent construction
loans secured by commercial and multi-family 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 as these loans typically carry
higher interest rates than residential mortgage loans. Substantially all of our
loans are originated within our market area which includes Shenandoah,
Rockingham, Page, Highland, Augusta, Albemarle, Bath, Rockbridge and Nelson
Counties, and the Hampton Roads area in Virginia.  Since 2004, our
residential loan portfolio as a percentage of our total loan portfolio has
steadily declined while our commercial real estate, construction, commercial
business and consumer lending portfolios have increased.  The change
is the result of our attempt to diversify our loan portfolio, maximize the
expertise of our loan officers and exploit the growth in our market
areas.  Additionally, the change in our loan portfolio has occurred
due to customers’ preference for fixed rate mortgage loans in a historically low
interest rate environment rather than adjustable rate mortgage
loans.  As part of our asset liability management strategy, we have
not originate fixed rate residential loans with terms of 15 years or more for
our portfolio for approximately six years.




Residential
loan originations come primarily from walk-in customers, real estate brokers and
builders. Commercial and multi-family 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 and any related business interests. If commercial or
multi-family 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 Freddie Mac and Fannie Mae 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 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 our Board of Directors.




Our loan
commitments are approved at different levels, depending on the size and type of
the loan being sought. Our Board of Directors has authorized different loan
limits for individual loan officers depending on the types of loans being
approved.  Individual loan officer limits for one-to four-family real
estate loans range from $100,000 to $300,000 and for commercial real estate
loans range from $100,000 to $175,000.  One- to four-family real
estate loans not exceeding $350,000 and commercial real estate loans not
exceeding $225,000 may be approved by the President of the Bank.  One-
to four-family real estate loans not exceeding $950,000 and commercial real
estate loans not exceeding $875,000 may be approved by one member of senior
management and two other officers.  Any loan not exceeding $1,000,000
may be approved by the Bank’s loan committee.  All mortgage loans in
excess of $1,000,000






3






must be
approved by the Board of Directors. Individual loan officer limits for unsecured
non-real estate loans range from $10,000 to $50,000 and secured non-real estate
loans range $15,000 to $175,000. Non-real estate loans up to $375,000 on a
secured basis and $150,000 on an unsecured basis require the approval of one
member of senior management and two other officers.  Non-real estate
loans in excess of individual loan officer or collective senior management loan
authority must be approved by a majority of our Loan Committee or Board of
Directors.




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 our unimpaired capital and surplus or $500,000. At March
31, 2008, the maximum amount which we could have loaned to one borrower and the
borrower’s related entities or invested in any one project was approximately
$6.3 million. At March 31, 2008, we only had 11borrowers, or groups of related
borrowers, with an aggregate outstanding loan balance at March 31, 2008, in
excess of $3.0 million, with the largest being a $6.25 million relationship
consisting of four loans secured by residential real estate and a
motel.  All of these loans in excess of $3.0 million are performing in
accordance with their payment terms.  We also had 14 other borrowers,
or groups of related borrowers, with an aggregate outstanding loan balance at
March 31, 2008 of between $2.0 million and $3.0 million, all of which loans are
performing in accordance to their payment terms.




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




March
      31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in Thousands)Real
      Estate Loans:Residential
            
            $
            122,605
            
            
            
            27.08
            %
            
            $
            118,044
            
            
            
            28.59
            %
            
            $
            115,169
            
            
            
            30.77
            %
            
            $
            123,256
            
            
            
            34.94
            %
            
            $
            121,143
            
            
            
            41.50
            %Commercial
            
            
            150,059
            
            
            
            33.14
            
            
            
            119,354
            
            
            
            28.91
            
            
            
            105,990
            
            
            
            28.32
            
            
            
            95,700
            
            
            
            27.12
            
            
            
            73,107
            
            
            
            25.04Construction
            
            
            53,891
            
            
            
            11.90
            
            
            
            48,857
            
            
            
            11.83
            
            
            
            41,645
            
            
            
            11.13
            
            
            
            35,019
            
            
            
            9.92
            
            
            
            25,321
            
            
            
            8.68Total
      real estate
            
            
            326,555
            
            
            
            72.12
            
            
            
            286,255
            
            
            
            69.33
            
            
            
            262,804
            
            
            
            70.22
            
            
            
            253,975
            
            
            
            71.98
            
            
            
            219,571
            
            
            
            75.22Consumer
      Loans:Home
      equity
            
            
            32,780
            
            
            
            7.24
            
            
            
            30,806
            
            
            
            7.46
            
            
            
            20,992
            
            
            
            5.61
            
            
            
            17,963
            
            
            
            5.09
            
            
            
            14,557
            
            
            
            4.99Automobile
            
            
            44,961
            
            
            
            9.93
            
            
            
            50,992
            
            
            
            12.34
            
            
            
            49,996
            
            
            
            13.36
            
            
            
            44,112
            
            
            
            12.50
            
            
            
            31,297
            
            
            
            10.72Other
            
            
            6,930
            
            
            
            1.53
            
            
            
            7,171
            
            
            
            1.74
            
            
            
            6,911
            
            
            
            1.84
            
            
            
            6,638
            
            
            
            1.88
            
            
            
            7,844
            
            
            
            3.46Total
      consumer
            
            
            84,671
            
            
            
            18.70
            
            
            
            88,969
            
            
            
            21.54
            
            
            
            77,899
            
            
            
            20.81
            
            
            
            68,713
            
            
            
            19.47
            
            
            
            55,939
            
            
            
            19.17Commercial
      business
            
            
            41,578
            
            
            
            9.18
            
            
            
            37,691
            
            
            
            9.13
            
            
            
            33,564
            
            
            
            8.97
            
            
            
            30,174
            
            
            
            8.55
            
            
            
            16,361
            
            
            
            5.61Total
      loans receivable
            
            
            452,804
            
            
            
            100.00
            %
            
            
            412,915
            
            
            
            100.00
            %
            
            
            374,267
            
            
            
            100.00
            %
            
            
            352,862
            
            
            
            100.00
            %
            
            
            291,871
            
            
            
            100.00
            %Less:Undisbursed
      loans in
              process
            
            
            13,599
            
            
            
            
            
            
            
            11,884
            
            
            
            
            
            
            
            13,822
            
            
            
            
            
            
            
            14,133
            
            
            
            
            
            
            
            10,480Deferred
      (costs) fees and
              unearned discounts
            
            
            (1,184
            )
            
            
            
            
            
            
            (1,299
            )
            
            
            
            
            
            
            (1,235
            )
            
            
            
            
            
            
            (1,100
            )
            
            
            
            
            
            
            (556
            )Allowance
      for losses
            
            
            3,215
            
            
            
            
            
            
            
            3,078
            
            
            
            
            
            
            
            2,966
            
            
            
            
            
            
            
            3,021
            
            
            
            
            
            
            
            2,646Total
      loans receivable, net
            
            $
            437,174
            
            
            
            
            
            
            $
            399,252
            
            
            
            
            
            
            $
            358,714
            
            
            
            
            
            
            $
            336,808
            
            
            
            
            
            
            $
            279,301








4


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




March
      31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent
            
            
            Amount
            
            
            Percent(Dollars
      in Thousands)Fixed-Rate
      Loans:Real
      Estate:Residential
            
            $
            22,146
            
            
            
            4.89
            %
            
            $
            24,657
            
            
            
            5.97
            %
            
            $
            25,952
            
            
            
            6.93
            %
            
            $
            34,129
            
            
            
            9.67
            %
            
            $
            27,132
            
            
            
            9.30
            %Commercial
            
            
            22,592
            
            
            
            4.99
            
            
            
            15,097
            
            
            
            3.66
            
            
            
            13,651
            
            
            
            3.65
            
            
            
            12,303
            
            
            
            3.49
            
            
            
            11,482
            
            
            
            3.93Construction(1)
            
            
            6,870
            
            
            
            1.52
            
            
            
            --
            
            
            
            0.00
            
            
            
            855
            
            
            
            0.23
            
            
            
            --
            
            
            
            0.00
            
            
            
            643
            
            
            
            0.22Total
      real estate loans
            
            
            51,608
            
            
            
            11.40
            
            
            
            39,754
            
            
            
            9.63
            
            
            
            40,458
            
            
            
            10.81
            
            
            
            46,432
            
            
            
            13.16
            
            
            
            39,257
            
            
            
            13.45Home
      equity
            
            
            5,692
            
            
            
            1.26
            
            
            
            4,972
            
            
            
            1.20
            
            
            
            4,816
            
            
            
            1.29
            
            
            
            4,413
            
            
            
            1.25
            
            
            
            7,779
            
            
            
            2.67Automobile
            
            
            44,843
            
            
            
            9.90
            
            
            
            50,895
            
            
            
            12.32
            
            
            
            49,840
            
            
            
            13.32
            
            
            
            43,970
            
            
            
            12.46
            
            
            
            31,115
            
            
            
            10.65Other
            
            
            5,872
            
            
            
            1.30
            
            
            
            5,619
            
            
            
            1.36
            
            
            
            5,548
            
            
            
            1.47
            
            
            
            5,488
            
            
            
            1.55
            
            
            
            4,096
            
            
            
            1.41Total
      consumer loans
            
            
            56,407
            
            
            
            12.46
            
            
            
            61,486
            
            
            
            14.88
            
            
            
            60,204
            
            
            
            16.08
            
            
            
            53,871
            
            
            
            15.26
            
            
            
            42,990
            
            
            
            14.73Commercial
      business
            
            
            19,912
            
            
            
            4.40
            
            
            
            17,721
            
            
            
            4.29
            
            
            
            15,340
            
            
            
            4.10
            
            
            
            11,330
            
            
            
            3.21
            
            
            
            6,218
            
            
            
            2.13Total
      fixed-rate loans
            
            
            127,927
            
            
            
            28.26
            
            
            
            118,961
            
            
            
            28.80
            
            
            
            116,002
            
            
            
            30.99
            
            
            
            111,633
            
            
            
            31.63
            
            
            
            88,465
            
            
            
            30.31Adjustable-Rate
      loans:Real
      Estate:Residential
            
            
            100,459
            
            
            
            22.19
            
            
            
            93,387
            
            
            
            22.62
            
            
            
            89,217
            
            
            
            23.84
            
            
            
            89,127
            
            
            
            25.27
            
            
            
            94,011
            
            
            
            32.20Commercial
            
            
            127,467
            
            
            
            28.15
            
            
            
            104,257
            
            
            
            25.25
            
            
            
            92,339
            
            
            
            24.67
            
            
            
            83,397
            
            
            
            23.63
            
            
            
            61,625
            
            
            
            21.11Construction(2)
            
            
            47,021
            
            
            
            10.38
            
            
            
            48,857
            
            
            
            11.83
            
            
            
            40,790
            
            
            
            10.90
            
            
            
            35,019
            
            
            
            9.92
            
            
            
            24,678
            
            
            
            8.46Total
      real estate loans
            
            
            274,9471
            
            
            
            60.72
            
            
            
            246,5011
            
            
            
            59.70
            
            
            
            222,346
            
            
            
            59.41
            
            
            
            207,543
            
            
            
            58.82
            
            
            
            180,314
            
            
            
            61.77Home
      equity
            
            
            27,088
            
            
            
            5.98
            
            
            
            25,834
            
            
            
            6.26
            
            
            
            16,176
            
            
            
            4.32
            
            
            
            13,550
            
            
            
            3.84
            
            
            
            6,778
            
            
            
            2.33Automobile
            
            
            118
            
            
            
            0.03
            
            
            
            97
            
            
            
            0.02
            
            
            
            156
            
            
            
            0.04
            
            
            
            142
            
            
            
            0.04
            
            
            
            182
            
            
            
            0.06Other
            
            
            1,058
            
            
            
            0.23
            
            
            
            1,552
            
            
            
            0.38
            
            
            
            1,363
            
            
            
            0.37
            
            
            
            1,150
            
            
            
            0.33
            
            
            
            5,989
            
            
            
            2.05Total
      consumer loans
            
            
            28,264
            
            
            
            6.24
            
            
            
            27,483
            
            
            
            6.66
            
            
            
            17,695
            
            
            
            4.73
            
            
            
            14,842
            
            
            
            4.21
            
            
            
            12,949
            
            
            
            4.44Commercial
      Business
            
            
            21,666
            
            
            
            4.78
            
            
            
            19,970
            
            
            
            4.84
            
            
            
            18,224
            
            
            
            4.87
            
            
            
            18,844
            
            
            
            5.34
            
            
            
            10,143
            
            
            
            3.48Total
      adjustable-rate
              loans
            
            
            324,877
            
            
            
            71.74
            
            
            
            293,954
            
            
            
            71.20
            
            
            
            258,265
            
            
            
            69.01
            
            
            
            241,229
            
            
            
            68.37
            
            
            
            203,406
            
            
            
            69.69Total
      loans receivable
            
            $
            452,804
            
            
            
            100.00
            %
            
            $
            412,915
            
            
            
            100.00
            %
            
            $
            374,267
            
            
            
            100.00
            %
            
            $
            352,862
            
            
            
            100.00
            %
            
            $
            291,871
            
            
            
            100.00
            %


_________________


(1)Includes
residential real estate construction loans of $247,000, $0, $0, $0, and
$643,000, and commercial real estate construction loans of $6.6 million,
$0, $855,000, $0, and $0 at March 31, 2008, 2007, 2006, 2005, and 2004,
respectively.




(2)Includes
residential real estate construction loans of $43.3 million, $47.2 million,
$39.6 million, $33.1 million, and $22.7 million, and commercial real estate
construction loans of $3.7 million, $1.7 million, $1.2 million, $1.9 million,
and $2.0 million at March 31, 2008, 2007, 2006, 2005 and 2004,
respectively.







5






Loan Maturity and
Repricing.  The following schedule illustrates the contractual
maturity of our real estate construction and commercial business loan portfolios
as of March 31, 2008, before net items.  Loans that have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due.  The schedule does not reflect the effects of
possible prepayments or enforcement of due-on-sale clauses.




Real
      Estate Construction
              or
      Development
            
            
            Commercial
              Business
            
            
            Total(Dollars
      in Thousands)Due
      during periods
              ending
      March 31,2009
            
            $
            47,422
            
            
            $
            21,833
            
            
            $
            69,2552010
      to
      2013
            
            
            6,469
            
            
            
            18,184
            
            
            
            24,653After
      2013
            
            
            --
            
            
            
            1,561
            
            
            
            1,561Totals
            
            $
            53,891
            
            
            $
            41,578
            
            
            $
            95,469





The total
amount of loans in the above table due after March 31, 2009, which have fixed
interest rates is $22.4 million, while the total amount of loans due after such
date which have floating or adjustable interest rates is $3.8
million.




One-to
Four-Family Residential Real Estate Lending.We originate loans
secured by one- to four-family residences, substantially all of which are
located in our market areas. 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. For the year ended March 31, 2008, 84.5% of all one-to
four-family residential loans we originated had adjustable interest rates. At
March 31, 2008, only $22.1 million, or 4.9%, of our total loans receivable,
before net items, consisted of fixed-rate residential mortgage
loans.




To
compete with other lenders in our market area, we make one, three, five, and to
a much lesser extent, seven and ten-year adjustable-rate mortgage (“ARM”) loans
at interest rates which, for the initial period, may be below the index rate
which would otherwise apply to these loans. Borrowers are qualified, however, at
the fully indexed interest rate. Our one- to four-family residential ARM loans
primarily have interest rates that adjust annually after the initial period,
based on a stated interest margin over the yields on one 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.  At March
31, 2008, residential ARM loans totaled $100.5 million, representing 81.9% of
our total residential real estate loans and 22.2% of our total loans receivable,
before net items. ARM loans generally pose different credit risks than
fixed-rate loans primarily because 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 originated by us contain a
“due-on-sale” clause that allows us to 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.






6






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 and residential real estate construction
loans. Our commercial real estate loans are secured by various types of
collateral, including raw land, multi-family residential buildings, hotels and
motels, convenience stores, commercial and industrial buildings, shopping
centers and churches. At March 31, 2008, commercial real estate and construction
loans aggregated $204.0 million or 45.0% of our total loans receivable, before
net items, with $174.5 million of these loans having adjustable interest rates
and $29.5 million having fixed interest rates. Our commercial real estate and
construction loans are secured primarily by properties located in our market
areas.




Our
commercial real estate loans are generally made at interest rates that adjust
annually 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 origination fees ranging from 1% to 2% on these
loans. Commercial real estate loans made by us are fully amortizing with
maturities ranging from five to 30 years.  Our construction loans are
generally for a term of 12 months or less with interest only due monthly.
Construction loans are generally made with permanent financing to be provided by
us, although not required. Construction loans to builders may be made on a basis
where a buyer has contracted to buy the house or the construction may be on a
speculative basis. Limits are set by us as to the number of each type of
construction loan for each builder, whether speculative or pre-sold, dependent
on the determination made by us during the underwriting process.




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  requires 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, 2008, we had commercial real estate loans totaling $150.1 million, including
68 commercial real estate loans (or multiple loans to one borrower) in excess of
$1.0 million with an aggregate balance of $130.7 million.  The largest
loan or lending relationship to a single borrower was for $6.25 million, which
consisted of four loans secured by residential real estate and a
motel.






7






The
following table presents information as to our commercial real estate and
commercial construction lending portfolio as of March 31, 2008, by type of
project.




Number
              of
      loans
            
            
            Principal
              Balance(Dollars
      in Thousands)Permanent
      financing:Multi-family
      residential buildings
            
            
            31
            
            
            $
            12,793Hotel
      and motel
            
            
            19
            
            
            
            18,184Commercial
      and industrial buildings
            
            
            102
            
            
            
            33,350Raw
      land
            
            
            194
            
            
            
            42,231Church
            
            
            10
            
            
            
            1,584Restaurant
            
            
            11
            
            
            
            2,477Warehouse
            
            
            29
            
            
            
            9,268Retail
      Store
            
            
            74
            
            
            
            25,532School/Recreational
            
            
            14
            
            
            
            4,640
      10,304Commercial
      construction
            
            
            5Total
            
            
            484
            
            
            $
            160,363





The
largest portion of our commercial real estate portfolio consists of loans
secured by raw land.  The Company originates loans to local real
estate developers with whom it has established relationships for the purpose of
developing residential subdivisions (i.e., installing roads, sewers, water and
other utilities), as well as loans to individuals to purchase building
lots.  Land loans are secured by a lien on the property and made for a
period usually not to exceed twelve months with an interest rate that adjusts
with the prime rate, and are made with loan-to-value ratios not exceeding 80%.
Monthly interest payments are required during the term of the loan. Land loans
for subdivisions are structured so that we are repaid in full upon the sale by
the borrower of approximately 90% of the subdivision lots. All of our land loans
are secured by property located in our primary market area.  We also
generally obtain personal guarantees from financially capable parties based on a
review of personal financial statements.  Loans secured by raw land
increased from $34.8 million at March 31, 2007 to $42.2 million at March 31,
2008, due primarily to the employment of additional loan officers and the
increased development activity in our market areas.




Loans
secured by undeveloped land or improved lots involve greater risks than one- to
four- family residential mortgage loans because these loans are advanced upon
the predicted future value of the developed property. If the estimate of the
future value proves to be inaccurate, in the event of default and foreclosure,
the Company may be confronted with a property the value of which is insufficient
to assure full repayment. Loans on raw land may run the risk of adverse zoning
changes, environmental or other restrictions on future use.  At March
31, 2008, we had $442,000 of non-performing raw land loans.




We also
make construction loans to individuals for the construction of their residences
as well as to builders and developers for the construction of non-residential
properties, one-to four-family residences and the development of one-to-four
family lots in Virginia. The loan amount on construction loans is generally
limited to 80% of the completed value of the project with inspections made
during the course of the project to ensure work is completed consistent with
draws. These
construction loans are generally for a term of 12 months or less with interest
only due monthly. Construction loans are generally made with permanent financing
to be provided by us, although not required. Construction loans to builders may
be






8






made on a
basis where a buyer has contracted to buy the house or the construction may be
on a speculative basis. Limits are set by us as to the number of each type of
construction loan for each builder, whether speculative or pre-sold, dependent
on the determination made by us during the underwriting process.  At
March 31, 2008, we had $43.5 million or 9.6% of our total loans receivable,
before net items, in 154 residential construction loans, the largest of which
was $956,000, compared to $47.2 million or 11.4% at March 31,
2007.  Residential construction loans totaled approximately 80.7% of
the total construction loan portfolio.




At March
31, 2008, we had five commercial construction loans totaling $10.4 million, the
largest one having an outstanding balance of $5,000,000. 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. The loan amount on construction loans is generally limited to
80% of the completed value of the project with inspections made during the
course of the project to ensure work is completed consistent with draws.Our construction loans
generally provide for a fixed rate of interest at the prevailing prime rate or
slightly above. Such loans are generally secured by the personal guarantees of
the borrowers and by first mortgages on the projects.




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 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 a variety of secured consumer loans, including new and used automobile
loans, home equity loans and lines of credit, and deposit account, installment
and demand loans.  We also offer unsecured loans.  We
originate our consumer loans primarily in our market areas.  At March
31, 2008, our consumer loans totaled $84.7 million or 18.7% of our total loans
receivable, before net items. With the exception of $27.1 million of home equity
lines of credit loans at March 31, 2008, our consumer loans primarily have fixed
interest rates and generally have terms ranging from 90 days to five
years.




The
largest component of our consumer loans is automobile loans. We originate
automobile loans on a direct and indirect basis.  Automobile loans
totaled $45.0 million at March 31, 2008, or 9.9% of our total loan portfolio,
before net items, with $6.8 million in direct loans and $38.2 million in
indirect loans.  Our automobile loan portfolio has increased from
$31.3 million for fiscal 2004 to $45.0 million at March 31, 2008, or
43.8%.  The increase in automobile loans is attributable to indirect
lending relationships with automobile dealerships in our lending
areas.  The bulk of our indirect lending comes from relationships with
approximately 40 car dealerships under an arrangement providing a premium for
the amount over our interest rate to the referring dealer, with approximately
half of these loans originated through four dealerships located in our market
area.  Indirect lending is highly competitive; however, our ability to






9






provide
same day funding makes our product competitive.  Automobile loans may
be written for a term of up to six years and have fixed rates of
interest.  Loan-to-value ratios are up to 110% of the manufacturer's
suggested retail price for new direct auto loans and 125% of the manufacturer's
invoice for new indirect auto loans.  For used car loans we use the
same loan-to-value ratios based on National Automobile Dealers Association
("NADA") retail value for direct loans and NADA trade-in value for indirect
loans.




The
automobile loans are generally evenly divided between new and used vehicles. The
automobile loans are primarily without recourse to the dealer but the Bank may
require either full or partial recourse to the dealer under certain
circumstances. If the customer’s credit history or the loan to value of the
vehicle warrants, the Bank may require full or partial recourse to the
dealer.




We follow
our internal underwriting guidelines in evaluating direct automobile loans,
including credit scoring.  Indirect automobile loans are underwritten
by a third party on our behalf, using substantially similar guidelines to our
internal guidelines.  However, because these loans are originated
through a third party and not directly by us, they present greater risks than
other types of lending activities.  At March 31, 2008, we had $1.0
million in non-performing automobile loans, which included $640,000 in indirect
automobile loans.




At March
31, 2008, our home equity loans totaled $32.8 million and comprised 7.2% of our
total loan portfolio, before net items, including $27.1 million of home equity
lines of credit.  Home equity loans may be originated in amounts,
together with the amount of the existing first mortgage, of up to 90% of the
value of the property securing the loan. The amount of the line of credit may
also not exceed 90% of the value of the property securing the
loan.  Home equity lines of credit are originated with an adjustable
rate of interest, based on the prime rate of interest or with a fixed rate of
interest.  Home equity lines of credit have a 20 year term and amounts
may be reborrowed after payment at any time during the life of the
loan.  At March 31, 2008, unfunded commitments on these lines of
credit totaled $21.5 million.




During
our fiscal year 2008, we evaluated the benefits of the increased yields on our
credit card portfolio with the higher risk and operating costs related to
maintaining and servicing an unsecured credit card portfolio. We believed that
offering a credit card product was important to our existing customer base and
for obtaining new customers. As a result of this evaluation, we entered into an
agent-bank relationship with an unaffiliated non-bank pursuant to which our
customers can obtain credit cards with the Community Bank brand and for which we
earn commissions for new accounts and a percentage of interchange fees, but for
which we incur no liability or credit risk. At the same time, we sold our
existing credit card portfolio to that unaffiliated organization. During the
September 30, 2007 quarter, we sold our credit card portfolio with an
approximate loan balance of $500,000 which resulted in a gain of
$37,000.




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






10






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 ($59,000 at March 31, 2008), there can be no
assurance that delinquencies will not increase in the future.




Commercial
Business Lending.At March 31, 2008, our
commercial business loans totaled $41.6 million, or 9.2%, of our total loans
receivable, before net items. 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.  Our
commercial business lending activities encompass loans with a variety of
purposes and security, including but are not limited to business automobiles,
equipment and accounts receivable.  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. An analysis of
the borrower’s past, present and future cash flows is also an important aspect
of our credit analysis.




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.




Loan
Originations




Federal
regulations authorize us to make real estate loans anywhere in the United
States. However, at March 31, 2008, substantially all of our real estate loans
were secured by real estate located in our market area.




We
originate both fixed-rate and adjustable-rate loans.  Our ability to
originate loans, however, is dependent upon customer demand for loans in our
market areas.  Demand is affected by competition and the interest rate
environment.




Loans
purchased must conform to our underwriting guidelines. We have not purchased any
loans during the last four fiscal years.  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 have not originated any fixed-rate loans
with maturities equal to or greater than 15 years in the last six years and as a
result have not sold any loans recently.




During
the past few years, we, like many other financial institutions, have experienced
significant prepayments on loans due to the low interest rate environment
prevailing in the United States.  In periods






11






of
economic uncertainty, the ability of financial institutions, including us, to
originate or purchase large dollar volumes of real estate loans may be
substantially reduced or restricted, with a resultant decrease in interest
income.




The
following table shows our loan origination and repayment activities for the
periods indicated.  We did not purchase or sell any loans during the
reported periods.




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006(In
      Thousands)Origination
      by Type:Adjustable
      Rate:Real
      estate -  1-4 family residential
            
            $
            34,113
            
            
            $
            38,784
            
            
            $
            27,140-
      commercial
            
            
            37,837
            
            
            
            24,554
            
            
            
            20,906Non-real
      estate – consumer
            
            
            531
            
            
            
            656
            
            
            
            8,703Total
      adjustable rate
            
            
            72,481
            
            
            
            63,994
            
            
            
            56,749Fixed
      Rate:Real
      estate -  1-4 family residential
            
            
            6,256
            
            
            
            7,006
            
            
            
            1,416-
      commercial
            
            
            9,452
            
            
            
            2,506
            
            
            
            10,242Non-real
      estate- consumer
            
            
            21,252
            
            
            
            26,143
            
            
            
            28,422Total
      fixed rate
            
            
            36,960
            
            
            
            35,655
            
            
            
            40,080Sales
      and Repayments:Principal
      repayments
            
            
            69,552
            
            
            
            61,001
            
            
            
            75,423Total
      reductions
            
            
            69,552
            
            
            
            61,001
            
            
            
            75,423Increase/(Decrease)
      in other items, net
            
            
            1,967
            
            
            
            (1,890
            )
            
            
            (500
            )Net
      increase
            
            $
            37,922
            
            
            $
            40,538
            
            
            $
            21,906





Asset
Quality




Delinquent
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., generally with 15 days of the loan
becoming delinquent. A notice is mailed to the borrower after a payment is 15
days past due and again when the loan is 30 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.




The
following table sets forth information concerning delinquent mortgage and other
loans at March 31, 2008. The amounts presented represent the total remaining
principal balances of the related loans, rather than the actual payment amounts
which are overdue.






12








Residential
              Real
      Estate
            
            
            Commercial
      Real Estate, Multi-Family and Land
            
            
            Construction
            
            
            Consumer
            
            
            Commercial
              Business
            
            
            TotalNumber
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount
            
            
            Number
            
            
            Amount(Dollars
      in Thousands)Loans
      Delinquent for:30-59
      days
            
            
            8
            
            
            $
            1,125
            
            
            
            2
            
            
            $
            294
            
            
            
            1
            
            
            $
            119
            
            
            
            89
            
            
            $
            794
            
            
            
            6
            
            
            $
            155
            
            
            
            106
            
            
            $
            2,48760-89
      days
            
            
            2
            
            
            
            120
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            9
            
            
            
            87
            
            
            
            5
            
            
            
            55
            
            
            
            16
            
            
            
            26290
      days and over
            
            
            4
            
            
            
            447
            
            
            
            2
            
            
            
            442
            
            
            
            --
            
            
            
            --
            
            
            
            7
            
            
            
            59
            
            
            
            2
            
            
            
            78
            
            
            
            15
            
            
            
            1,026Total
      delinquent loans
            
            
            14
            
            
            $
            1,692
            
            
            
            4
            
            
            $
            736
            
            
            
            1
            
            
            $
            119
            
            
            
            105
            
            
            $
            940
            
            
            
            13
            
            
            $
            288
            
            
            
            137
            
            
            $
            3,775





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  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 no accruing
loans 90 days or more delinquent and 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 market rates).




March
      31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(Dollars
      in Thousands)Non-accruing
      loans:Commercial
      business and consumer
            
            $
            137
            
            
            $
            142
            
            
            $
            230
            
            
            $
            70
            
            
            $
            37Real
      Estate
            
            
            889
            
            
            
            1,173
            
            
            
            239
            
            
            
            339
            
            
            
            1,076Total
      non-accruing loans
            
            
            1,026
            
            
            
            1,315
            
            
            
            469
            
            
            
            409
            
            
            
            1,113Real
      estate acquired through
              foreclosure
            
            
            593
            
            
            
            181
            
            
            
            120
            
            
            
            139
            
            
            
            621Total
      non-performing assets
            
            $
            1,619
            
            
            $
            1,496
            
            
            $
            589
            
            
            $
            548
            
            
            $
            1,734Total
      as a percentage of total assets
            
            
            .33
            %
            
            
            .32
            %
            
            
            .14
            %
            
            
            .14
            %
            
            
            .51
            %Allowance
      for loan losses
            
            $
            3,215
            
            
            $
            3,078
            
            
            $
            2,966
            
            
            $
            3,021
            
            
            $
            2,646





Non-performing
assets at March 31, 2008 were comprised primarily of real estate owned,
repossessed automobiles and loans delinquent 90 days or more. 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.




Nonaccrual
loans amounted to $1,026,000 at March 31, 2008.  If interest on these
loans had been accrued, such income would have approximated $45,000 for the year
ended March 31, 2008, none of which is included in interest income.







13




Other Loans Of
Concern.In addition to
the non-performing assets set forth in the table above, as of March 31, 2008, we
had approximately $5.1 million of 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.  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. These loans have been considered in management's
determination of our allowance for loan losses.




Of the
$5.1 million in other loans of concern, $2.8 million is comprised of residential
real estate and consumer loans and $2.3 million commercial real estate and
business loans.




Classified
Assets.Federal regulations provide for the classification of
loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision to be of lesser quality, as "substandard,"
"doubtful" or "loss."  An asset is considered "substandard" if it is
inadequately protected by the current net worth and paying capacity of the
obligor or of the collateral pledged, if any.  "Substandard" assets
include those characterized by the "distinct possibility" that the insured
institution will sustain "some loss" if the deficiencies are not
corrected.  Assets classified as "doubtful" have all of the weaknesses
in those classified "substandard," with the added characteristic that the
weaknesses present make "collection or liquidation in full," on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable."  Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not
warranted.




When an
insured institution classifies problem assets as either substandard or doubtful,
it may establish general allowances for loan losses in an amount deemed prudent
by management.  General allowances represent loss allowances which
have been established to recognize the risk associated with lending activities,
but which, unlike specific allowances, have not been allocated to particular
problem assets.  When an insured institution classifies problem assets
as "loss," it is required either to establish a specific allowance for losses
equal to 100% of that portion of the asset so classified or to charge off such
amount.  An institution's determination as to the classification of
its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision and the Federal Deposit Insurance Corporation,
which may order the establishment of additional general or specific loss
allowances.




We
regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable
regulations.  On the basis of management’s review of our assets, at
March 31, 2008, we had classified $3.2 million of our assets as substandard,
none as doubtful and none as loss. The $3.2 million in classified loans is
comprised primarily of residential and commercial real estate
loans.




Allowance for
Losses on Loans and Real Estate.  We provide valuation
allowances 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 allowances 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
allowances may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations.  See "Management's Discussion and Analysis of
Financial Condition






14






and
Results of Operations - Results of Operations - Provision for Loan Losses”
in Item 7 of this report and Note 2 of the Notes to Consolidated Financial
Statements in Item 8 of this report.




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




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(Dollars
      in Thousands)Balance
      at beginning of period
            
            $
            3,078
            
            
            $
            2,966
            
            
            $
            3,021
            
            
            $
            2,646
            
            
            $
            1,940Provision
      charged to operations
            
            
            625
            
            
            
            388
            
            
            
            177
            
            
            
            870
            
            
            
            846Charge-offs:Residential
      real
      estate
            
            
            (44
            )
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            (46
            )Commercial
      Real Estate, Multifamily and Land.
            
            
            (3
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (241
            )
            
            
            ---Construction
            
            
            (25
            )
            
            
            ---
            
            
            
            ---
            
            
            
            (51
            )
            
            
            (24
            )Home
      Equity
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Automobile
            
            
            (437
            )
            
            
            (279
            )
            
            
            (236
            )
            
            
            (332
            )
            
            
            (176
            )Other
            
            
            (73
            )
            
            
            (76
            )
            
            
            (79
            )
            
            
            (50
            )
            
            
            (43
            )Commercial
      Business
            
            
            (41
            )
            
            
            (2
            )
            
            
            (29
            )
            
            
            (6
            )
            
            
            ---Recoveries:Residential
      real
      estate
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            11
            
            
            
            69Commercial
      Real Estate, Multifamily and Land.
            
            
            1
            
            
            
            ---
            
            
            
            ---
            
            
            
            43
            
            
            
            ---Construction
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---Home
      Equity
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            4
            
            
            
            ---Automobile
            
            
            79
            
            
            
            55
            
            
            
            63
            
            
            
            85
            
            
            
            54Other
            
            
            10
            
            
            
            26
            
            
            
            49
            
            
            
            29
            
            
            
            26Commercial
      Business
            
            
            45
            
            
            
            ---
            
            
            
            ---
            
            
            
            13
            
            
            
            ---Net
      charge-offs
            
            
            (488
            )
            
            
            (276
            )
            
            
            (232
            )
            
            
            (495
            )
            
            
            (140
            )Balance
      at end of
      period
            
            $
            3,215
            
            
            $
            3,078
            
            
            $
            2,966
            
            
            $
            3,021
            
            
            $
            2,646Ratio
      of net charge-offs during the
              period
      to average loans outstanding
              during
      the
      period
            
            
            .12
            %
            
            
            .07
            %
            
            
            .07
            %
            
            
            .16
            %
            
            
            .05
            %





15


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




Residential
            
            
            Commercial
      Real Estate,
              Multi-Family
      and Land
            
            
            Construction
            
            
            Commercial
              Business
            
            
            Home
      Equity
            
            
            Consumer
            
            
            Total(Dollars
      in Thousands)March
      31, 2008:Amount
      of loan
              loss
      allowance
            
            $
            258
            
            
            $
            981
            
            
            $
            383
            
            
            $
            565
            
            
            $
            130
            
            
            $
            898
            
            
            $
            3,215Percent
      of loans
              in
      each category
              to
      total loans
            
            
            27.08
            %
            
            
            33.14
            %
            
            
            11.90
            %
            
            
            9.18
            %
            
            
            7.24
            %
            
            
            11.46
            %
            
            
            100.00
            %March
      31, 2007:Amount
      of loan
              loss
      allowance
            
            $
            238
            
            
            $
            819
            
            
            $
            354
            
            
            $
            530
            
            
            $
            109
            
            
            $
            1,028
            
            
            $
            3,078Percent
      of loans
              in
      each category
              to
      total loans
            
            
            28.59
            %
            
            
            28.90
            %
            
            
            11.83
            %
            
            
            9.13
            %
            
            
            7.46
            %
            
            
            14.09
            %
            
            
            100.00
            %March
      31, 2006:Amount
      of loan
              loss
      allowance
            
            $
            250
            
            
            $
            713
            
            
            $
            350
            
            
            $
            514
            
            
            $
            96
            
            
            $
            1,043
            
            
            $
            2,966Percent
      of loans
              in
      each category
              to
      total loans
            
            
            30.77
            %
            
            
            28.32
            %
            
            
            11.13
            %
            
            
            8.97
            %
            
            
            5.61
            %
            
            
            15.20
            %
            
            
            100.00
            %March
      31, 2005:Amount
      of loan
              loss
      allowance
            
            $
            308
            
            
            $
            718
            
            
            $
            409
            
            
            $
            554
            
            
            $
            109
            
            
            $
            923
            
            
            $
            3,021Percent
      of loans
              in
      each category
              to
      total loans
            
            
            34.94
            %
            
            
            27.12
            %
            
            
            9.92
            %
            
            
            8.55
            %
            
            
            5.09
            %
            
            
            14.38
            %
            
            
            100.00
            %March
      31, 2004:Amount
      of loan
              loss
      allowance
            
            $
            283
            
            
            $
            889
            
            
            $
            299
            
            
            $
            286
            
            
            $
            112
            
            
            $
            777
            
            
            $
            2,646Percent
      of loans
              in
      each category
              to
      total loans
            
            
            41.49
            %
            
            
            25.05
            %
            
            
            8.68
            %
            
            
            5.61
            %
            
            
            4.99
            %
            
            
            14.18
            %
            
            
            100.00
            %










16




Investment
Activities




Federally
chartered savings institutions have the authority to invest in various types of
liquid assets, including United States Treasury obligations, securities of
various federal agencies, including callable agency securities, certain
certificates of deposit of insured banks and savings institutions, certain
bankers' acceptances, repurchase agreements and federal
funds.  Subject to various restrictions, federally chartered savings
institutions may also invest their assets in investment grade commercial paper
and corporate debt securities and mutual funds whose assets conform to the
investments that a federally chartered savings institution is otherwise
authorized to make directly.  See "Regulation - Qualified Thrift
Lender Test" below for a discussion of additional restrictions on our investment
activities.




The
senior vice president/chief financial officer has the basic responsibility for
the management of our investment portfolio, subject to the direction and
guidance of the asset/liability management committee.  The senior vice
president/chief financial officer considers various factors when making
decisions, including the marketability, maturity and tax consequences of the
proposed investment.  The maturity structure of investments will be
affected by various market conditions, including the current and anticipated
slope of the yield curve, the level of interest rates, the trend of new deposit
inflows, and the anticipated demand for funds via deposit withdrawals and loan
originations and purchases.




The
general objectives of our investment portfolio are to assist in maintaining
earnings when loan demand is low and to maximize earnings while satisfactorily
managing risk, including credit risk, reinvestment risk, liquidity risk and
interest rate risk.  See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset and Liability Management"
in Item 7 of this Form 10-K.




As a
member of the Federal Home Loan Bank of Atlanta, we had $5.2 million in stock of
the Federal Home Loan Bank of Atlanta at March 31, 2008 and for the year ended
March 31, 2008, we received $311,000 in dividends on such stock.




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




March
      31, 2008Within
      1
              Year
      or
              Less
            
            
            After
      1
              Year
              through
      5
              Years
            
            
            After
      5
              Years
              through
              10
      Years
            
            
            Total
              Investment
              Securities(1)Book
              Value
            
            
            Book
              Value
            
            
            Book
              Value
            
            
            Book
              Value
            
            
            Market
              Value(Dollars
      in Thousands)Federal
      agency obligations
            
            $
            500
            
            
            $
            2,000
            
            
            $
            ---
            
            
            $
            2,500
            
            
            $
            2,507State
      agency obligations
              and
      commercial paper
            
            
            240
            
            
            
            200
            
            
            
            ---
            
            
            
            440
            
            
            
            441Total
      Investment Securities
            
            $
            740
            
            
            $
            2,200
            
            
            $
            ---
            
            
            $
            2,940
            
            
            $
            2,948Weighted
      Average Yield(2)
            
            
            2.98
            %
            
            
            4.05
            %
            
            
            ---
            %
            
            
            3.78
            %
            
            
            3.77
            %


______________________


(1)  Included
in the above table are $2.0 million of securities that are callable in three
years or less.




(2)  The
weighted average yield is not computed on a tax equivalent basis.




17


The
following table sets forth the composition of our available for sale and held to
maturity securities portfolios at the dates indicated.  At March 31,
2008, our securities portfolio did not contain securities of any issuer with an
aggregate book value in excess of 10% of our equity capital, excluding those
issued by the United States Government or its agencies.  See Note 1 of
the Notes to Consolidated Financial Statements in Item 8 of this report for
additional information on our investment securities.




March
      31,2008
            
            
            2007
            
            
            2006Book
              Value
            
            
            %
      of
              Total
            
            
            Book
              Value
            
            
            %
      of
              Total
            
            
            Book
              Value
            
            
            %
      of
              Total(Dollars
      in Thousands)Interest-bearing
      deposits with banks
            
            $
            12,762
            
            
            
            100.0
            %
            
            $
            1,045
            
            
            
            100.0
            %
            
            $
            1,742
            
            
            
            100.0
            %Investment
      securities:Federal
      agency obligations
            
            $
            2,500
            
            
            
            14.1
            %
            
            $
            22,581
            
            
            
            52.9
            %
            
            $
            23,333
            
            
            
            53.9
            %State
      agencies and commercial paper
            
            
            440
            
            
            
            2.5
            
            
            
            1,005
            
            
            
            2.4
            
            
            
            2,138
            
            
            
            4.9United
      States agency equity securities
            
            
            9,562
            
            
            
            54.0
            
            
            
            14,250
            
            
            
            33.4
            
            
            
            13,539
            
            
            
            31.2Subtotal
            
            
            12,502
            
            
            
            70.6
            
            
            
            37,836
            
            
            
            88.7
            
            
            
            39,010
            
            
            
            90.0FHLB
      stock
            
            
            5,211
            
            
            
            29.4
            
            
            
            4,822
            
            
            
            11.3
            
            
            
            4,350
            
            
            
            10.0Total
      investment securities
              and
      FHLB stock
            
            $
            17,713
            
            
            
            100.0
            %
            
            $
            42,658
            
            
            
            100.0
            %
            
            $
            43,360
            
            
            
            100.0
            %Average
      remaining life or term
              to
      repricing (1)
            
            
            
            
            
            2
      Years
            
            
            
            
            
            
            2
      Years
            
            
            
            
            
            
            3
      Years


____________________


(1)  Excludes
Freddie Mac common stock and other marketable equity securities.




During
fiscal 2008, the market rates paid on investment securities
decreased.  During fiscal 2008 and 2007, we made limited investment
securities purchases due to the minimal spread between short and long term rates
during most of  these reporting periods.




The above
table includes preferred stock issued by government agencies that are investment
grade or better. One of the preferred stock issues is the Freddie Mac preferred
series L with a par value of $50 per share. At March 31, 2008, this preferred
stock issue had a fair value of $759,500 and unrealized loss of $469,240. The
dividend rate of this issue resets every five years based on the five year
treasury rate. The next dividend reset date for this security is December 31,
2009. During the fiscal year 2007, management engaged an investment advisor to
assist in the determination of the expected fair value of this preferred issue
at the next dividend reset date and to assess for any potential permanent
impairment. Management anticipates that the fair value of this issue will
approximate the security’s par value on the next dividend reset date. The
Corporation has the intent and ability to retain its investment in the issuer
for a period of time sufficient to allow for any anticipated recovery in fair
value.




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 our deposit accounts, repurchase agreements entered into with
commercial banks and FHLB of Atlanta advances.






18


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 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 more
jumbo certificates of deposit and individual retirement 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.




March
      31,2008
            
            
            2007
            
            
            2006(In
      Thousands)Passbook
      and statement accounts
            
            $
            27,520
            
            
            $
            27,584
            
            
            $
            31,228NOW
      and Super NOW accounts
            
            
            55,034
            
            
            
            58,109
            
            
            
            58,484Money
      market accounts
            
            
            22,364
            
            
            
            20,122
            
            
            
            21,345One-to
      five-year fixed-rate certificates
            
            
            210,903
            
            
            
            221,069
            
            
            
            185,501Six-month
      and 91 day certificates
            
            
            34,910
            
            
            
            3,654
            
            
            
            10,291Total
            
            $
            350,731
            
            
            $
            330,538
            
            
            $
            306,849





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.






19






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




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006(Dollars
      in Thousands)Opening
      balance
            
            $
            330,538
            
            
            $
            306,849
            
            
            $
            275,430Net
      deposits
            
            
            8,677
            
            
            
            15,811
            
            
            
            25,547Interest
      credited
            
            
            11,516
            
            
            
            7,878
            
            
            
            5,872Ending
      balance
            
            $
            350,731
            
            
            $
            330,538
            
            
            $
            306,849Net
      increase
            
            $
            20,193
            
            
            $
            23,689
            
            
            $
            31,419Percent
      increase
            
            
            6.11
            %
            
            
            7.72
            %
            
            
            11.41
            %





During
fiscal 2006, the change in deposits was related primarily to rising interest
rates and customers’ preference for higher rate time deposits. We remained
competitive on deposit rates and in particular on time deposits. Due to these
efforts we experienced an increase in both non-interest bearing demand and time
deposits during fiscal 2006. During fiscal 2007, the change in deposits was
related primarily to rising interest rates and customers’ preference for higher
rate time deposits. We remained competitive on deposit rates and in particular
on time deposits. During fiscal 2008, the increase in deposits was related
primarily to customers’ preference for relatively higher rate short-term time
deposits in a declining rate environment. We may use borrowings from time to
time as an alternative source of funds. See “- Borrowings.”




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 31,2008
            
            
            2007
            
            
            2006Average
              Balance
            
            
            Average
              Rate
      Paid
            
            
            Average
              Balance
            
            
            Average
              Rate
      Paid
            
            
            Average
              Balance
            
            
            Average
              Rate
      Paid(Dollars
      in Thousands)Deposit
      Category:Non-interest
      bearing demand deposits
            
            $
            27,641
            
            
            
            ---
            %
            
            $
            29,549
            
            
            
            ---
            %
            
            $
            28,602
            
            
            
            ---
            %Interest
      bearing demand deposits
            
            
            45,747
            
            
            
            1.50
            
            
            
            45,042
            
            
            
            1.32
            
            
            
            45,960
            
            
            
            0.96Savings
      deposits
            
            
            27,690
            
            
            
            1.33
            
            
            
            28,115
            
            
            
            0.80
            
            
            
            35,893
            
            
            
            0.73Time
      deposits
            
            
            236,530
            
            
            
            4.78
            
            
            
            208,501
            
            
            
            4.43
            
            
            
            175,811
            
            
            
            3.52Total
      deposits
            
            $
            337,608
            
            
            
            3.66
            %
            
            $
            311,207
            
            
            
            3.23
            %
            
            $
            286,266
            
            
            
            2.41
            %







20


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




Less
      Than
              2.00%
            
            
            
            2.00-
      3.00
            %
            
            
            3.01-
      4.00
            %
            
            
            4.01-
      5.00
            %
            
            
            5.01-
      6.00
            %
            
            
            6.01-
      7.00
            %
            
            Total(Dollars
      in Thousands)March
      31, 2008
            
            $
            88
            
            
            $
            4,253
            
            
            $
            56,806
            
            
            $
            136,432
            
            
            $
            48,234
            
            
            $
            ---
            
            
            $
            245,813March
      31, 2007
            
            $
            ---
            
            
            $
            10,366
            
            
            $
            25,536
            
            
            $
            78,910
            
            
            $
            109,911
            
            
            $
            ---
            
            
            $
            224,723March
      31, 2006
            
            $
            1,627
            
            
            $
            32,378
            
            
            $
            58,252
            
            
            $
            100,186
            
            
            $
            3,349
            
            
            $
            ---
            
            
            $
            195,792





The
following table indicates the amount of the certificates of deposit by time
remaining until maturity as of March 31, 2008.




Maturity3
      Months
              or
      less
            
            
            Over
      3
              Months
              through
              6
      Months
            
            
            Over
      6
              Months
              through
              12
      Months
            
            
            Over
      12
              Months
            
            
            Total(Dollars
      in Thousands)Certificates
      of deposit less than $100,000
            
            $
            38,416
            
            
            $
            72,001
            
            
            $
            35,350
            
            
            $
            27,656
            
            
            $
            173,423Certificates
      of deposit of $100,000 or more
            
            
            14,921
            
            
            
            31,246
            
            
            
            15,023
            
            
            
            11,200
            
            
            
            72,390Total
      certificates of deposit
            
            $
            53,337
            
            
            $
            103,247
            
            
            $
            50,373
            
            
            $
            38,856
            
            
            $
            245,813





Borrowings




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.  Our borrowings generally consist of 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.  At March 31, 2008, we had $2,834,000 of securities sold
under agreements to repurchase which adjust with the federal funds rate. For
additional information on our borrowings and securities sold under agreements to
repurchase, see Notes 6 and 7 of the Notes to Consolidated Financial Statements
contained in Item 8 of this report.




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


21






At
      March 31,2008
            
            
            2007
            
            
            2006(Dollars
      in thousands)Securities
      sold under agreements to repurchase
            
            $
            2,834
            
            
            $
            1,740
            
            
            $
            976FHLB
      advances
            
            
            96,000
            
            
            
            89,000
            
            
            
            78,000Total
      Borrowings
            
            $
            98,834
            
            
            $
            90,740
            
            
            $
            78,976Weighted
      average interest rate of borrowings
            
            
            2.74
            %
            
            
            5.18
            %
            
            
            4.71
            %





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




At
      or for the Year Ended March 31,
            
            2008
            
            
            2007
            
            
            2006(Dollars
      in Thousands)Amount
      outstanding at year
      end
            
            $
            76,000
            
            
            $
            84,000
            
            
            $
            73,000Average
      interest rate on amount at year end
            
            
            2.75
            %
            
            
            5.35
            %
            
            
            4.85
            %Average
      amount outstanding during the year
            
            $
            87,962
            
            
            $
            85,003
            
            
            $
            67,167Average
      interest rate during the
      year
            
            
            4.80
            %
            
            
            5.34
            %
            
            
            4.00
            %Maximum
      amount outstanding during the year
            
            $
            100,000
            
            
            $
            91,000
            
            
            $
            77,000





Subsidiary
Activities




There are no significant subsidiary
activities.





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 markets for deposits to be Augusta County and Hampton Roads
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 15% 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.




22


Regulation




General.  Set
forth below is a brief description of certain laws and regulations that are
applicable to Community Financial and Community Bank.  The description
of these laws and regulations, as well as descriptions of laws and regulations
contained elsewhere herein, does not purport to be complete and is qualified in
its entirety by reference to the applicable laws and regulations.




Legislative
or regulatory changes in the future could adversely affect our operations and
financial condition.  No assurance can be given as to whether or in
what form any such changes may occur.




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




Federal
Regulation of Savings Associations.  Community Bank, as a
federally chartered savings bank, is subject to regulation and oversight by the
Office of Thrift Supervision extending to all aspects of its
operations.  This regulation of Community Bank is intended for the
protection of depositors and the insurance of accounts fund and not for the
purpose of protecting shareholders.  Community Bank is required to
maintain minimum levels of regulatory capital and is subject to some limitations
on the payment of dividends to Community Financial.  See “- Regulatory
Capital Requirements” and “- Limitations on Dividends and Other Capital
Distributions.”  Community Bank also is subject to regulation and
examination by the Federal Deposit Insurance Corporation, which insures the
deposits of Community Bank to the maximum extent permitted by law.




We are
subject to periodic examinations by the Office of Thrift
Supervision.  During these examinations, the examiners may require
Community Bank to provide for higher general or specific loan loss reserves,
which can impact our capital and earnings.  As a federal savings bank,
Community Bank is subject to a semi-annual assessment, based upon its total
assets, to fund the operations of the Office of Thrift Supervision.




The
Office of Thrift Supervision has adopted guidelines establishing safety and
soundness standards on such matters as loan underwriting and documentation,
asset quality, earnings standards, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits.  Any
institution regulated by the Office of Thrift Supervision that fails to comply
with these standards must submit a compliance plan.




Insurance of
Accounts and Regulation by the FDIC. Community Bank’s deposits
are insured up to applicable limits by the Deposit Insurance Fund of the FDIC.
The Deposit Insurance Fund is the successor to the Bank Insurance Fund and the
Savings Association Insurance Fund, which were merged effective March 31,
2006.  As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC-insured
institutions.  It also may prohibit any FDIC-insured institution from
engaging in any activity the FDIC determines by regulation or order to pose a
serious risk to the fund.  The FDIC also has the authority to initiate
enforcement actions against savings institutions, after giving the OTS an
opportunity to take such action, and may terminate the




23


deposit
insurance if it determines that the institution has engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.




The FDIC
recently amended its risk-based assessment system for 2007 to implement
authority granted by the Federal Deposit Insurance Reform Act of 2005, which was
enacted in 2006 (“Reform Act”). Under the revised system, insured institutions
are assigned to one of four risk categories based on supervisory evaluations,
regulatory capital levels and certain other factors. An institution's assessment
rate depends upon the category to which it is assigned. Risk category I, which
contains the least risky depository institutions, is expected to include more
than 90% of all institutions. Unlike the other categories, Risk Category I
contains further risk differentiation based on the FDIC's analysis of financial
ratios, examination component ratings and other information. Assessment rates
are determined by the FDIC and currently range from five to seven basis points
for the healthiest institutions (Risk Category I) to 43 basis points of
assessable deposits for the riskiest (Risk Category IV). The FDIC may adjust
rates uniformly from one quarter to the next, except that no single adjustment
can exceed three basis points. No institution may pay a dividend if in default
of the FDIC assessment.





The
Reform Act also provided for a one-time credit for eligible institutions based
on their assessment base as of December 31, 1996. Subject to certain limitations
with respect to institutions that are exhibiting weaknesses, credits can be used
to offset assessments until exhausted. Community Bank’s had exhausted all its
one-time credits as of March 31, 2008. The Reform Act also provided for the
possibility that the FDIC may pay dividends to insured institutions once the
Deposit Insurance Fund reserve ratio equals or exceeds 1.35% of estimated
insured deposits.





In
addition to the assessment for deposit insurance, institutions are required to
make payments on bonds issued in the late 1980s by the Financing Corporation to
recapitalize a predecessor deposit insurance fund. This payment is established
quarterly and during the calendar year ending March 31, 2008 averaged 1.16 basis
points of assessable deposits.





The
Reform Act provided the FDIC with authority to adjust the Deposit Insurance Fund
ratio to insured deposits within a range of 1.15% and 1.50%, in contrast to the
prior statutorily fixed ratio of 1.25%. The ratio, which is viewed by the FDIC
as the level that the fund should achieve, was established by the agency at
1.25% for 2007.





The FDIC
has authority to increase insurance assessments. A significant increase in
insurance premiums would likely have an adverse effect on the operating expenses
and results of operations of the Bank. There can be no prediction as to what
insurance assessment rates will be in the future.  Insurance of
deposits may be terminated by the FDIC upon a finding that the institution has
engaged in unsafe or unsound practices, is in an unsafe or unsound condition to
continue operations or has violated any applicable law, regulation, rule, order
or condition imposed by the FDIC or the OTS.  We are not aware of any
practice, condition or violation that might lead to termination of the Bank’s
deposit insurance.





Transactions with
Affiliates.  Transactions
between Community Bank and its affiliates generally are required to be on terms
as favorable to the institution as transactions with non-affiliates, and certain
of these transactions, such as loans to an affiliate, are restricted to a
percentage of Community Bank's capital.  In addition, Community Bank
may not lend to any affiliate engaged in activities not permissible for a bank
holding company or acquire the securities of most
affiliates.  Community Financial is an affiliate of Community
Bank.




24




Regulatory
Capital Requirements.  To be considered
well capitalized, an institution must have a ratio of Tier 1 capital to total
adjusted assets of at least 5.0%, a ratio of Tier 1 capital to risk-weighted
assets of at least 6.0%, and a ratio of total capital to risk-weighted assets of
at least 10.0%.  Tier 1 capital generally consists of common
stockholders’ equity, retained earnings and certain noncumulative perpetual
preferred stock, plus certain intangibles.  At March 31, 2008,
Community Bank had no intangibles in Tier 1 capital.




Total
capital consists of Tier 1 and Tier 2 capital.  Tier 2 capital
generally consists of certain permanent and maturing capital instruments that do
no qualify as Tier 1 capital and up to 1.25% of risk-weighted assets in
allowance for loan and lease losses.  The amount of Tier 2 capital
includable in total capital may not exceed the amount of Tier 1
capital.  Risk-weighted assets are determined by assigning a risk
weight ranging from 0% to 100% to all assets and certain off-balance sheet
items.  At March 31, 2008, Community Bank was adequately
capitalized.




To be
adequately capitalized, an institution must have a ratio of Tier 1 capital to
total adjust assets of at least 4.0%, a ratio of Tier 1 capital to risk-weighted
assets of at least 4.0% and a ratio of total capital to risk-weighted assets of
at least 8.0%.  The Office of Thrift Supervision is authorized to
require Community Bank to maintain an additional amount of total capital to
account for concentration of credit risk, level of interest rate risk, equity
investments in non-financial companies and the risk of non-traditional
activities.




The
Office of Thrift Supervision is authorized, and under certain circumstances
required, to take certain actions against savings banks that are not at least
adequately capitalized.  Any such institution must submit a capital
restoration plan and until such plan is approved by the Office of Thrift
Supervision may not increase its assets, acquire another institution, establish
a branch or engage in any new activities, and generally may not make capital
distributions.  Additional restrictions may apply, including a forced
merger, acquisition, or liquidation of the institution.  The Office of
Thrift Supervision generally is authorized to reclassify an institution into a
lower capital category and impose the restrictions if the institution is engaged
in unsafe or unsound practices or is in an unsafe or unsound
condition.  The imposition by the Office of Thrift Supervision of any
of these measures on Community Bank may have a substantial adverse effect on our
operations and profitability.  Regulatory capital is discussed further
in Note 10 of the Notes to Consolidated Financial Statements contained in Item 8
of this report.




Community
Financial is not subject to any specific capital requirements.  The
Office of Thrift Supervision, however, expects Community Financial to support
Community Bank, including providing additional capital to the bank when it does
not meet its capital requirements.  As a result of this expectation,
the Office of Thrift Supervision regulates the ability of Community Bank to pay
dividends to Community Financial.




Limitations on
Dividends and Other Capital Distributions.  Office of Thrift
Supervision regulations impose various restrictions on savings institutions with
respect to the ability of Community Bank to make distributions of capital, which
include dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account.  Community Bank must file
a notice or application with the Office of Thrift Supervision before making any
capital distribution.  Community Bank generally may make capital
distributions during any calendar year in an amount up to 100% of net income for
the year-to-date plus retained net income for the two preceding years, so long
as it is well-capitalized after the distribution.  If Community Bank,
however, proposes to make a capital distribution when it does not meet the
requirements to be adequately capitalized (or will not following the proposed
capital distribution) or that will exceed these net income limitations, it must
obtain Office of Thrift Supervision approval prior to making such
distribution.  The Office of Thrift Supervision may object to any
distribution based on safety and soundness concerns.




25


Community
Financial will not be subject to Office of Thrift Supervision regulatory
restrictions on the payment of dividends.  Dividends from Community
Financial, however, may depend, in part, upon its receipt of dividends from
Community Bank.




Qualified Thrift
Lender Test.  All savings associations, including Community
Bank, are required to meet a qualified thrift lender 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, 2008, Community
Bank met the test and has always met the test since its effective
date.




Any
savings institution that fails to meet the qualified thrift lender test must
convert to a national bank, unless it requalifies as a qualified thrift lender
and thereafter remains a qualified thrift lender.  If any institution
that fails the qualified thrift lender test is controlled by a holding company,
then within one year after the failure, the holding company must register as a
bank holding company and become subject to all restrictions on bank holding
companies. See"-Holding Company Regulation."




Community
Reinvestment Act.  Under the Community Reinvestment Act, every
Federal Deposit Insurance Corporation 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 Community Reinvestment Act 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
Community Reinvestment Act. The Community Reinvestment Act requires the Office
of Thrift Supervision, 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 Office of Thrift Supervision. Community Bank was examined for Community
Reinvestment Act compliance in January, 2005 and received a rating of
“Satisfactory”.




Holding Company
Regulation.  Community Financial is a unitary savings and loan
holding company subject to regulatory oversight by the Office of Thrift
Supervision. As such, we are required to register and file reports with the
Office of Thrift Supervision and are subject to regulation and examination by
the Office of Thrift Supervision. In addition, the Office of Thrift Supervision
has enforcement authority over us and our non-savings association subsidiaries,
which also permits the Office of Thrift Supervision 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 that acquired Community Bank before May
4, 1999, we generally are not subject to activity restrictions. If we acquire
control of one or more savings associations as a separate subsidiary, our
activities and those of 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 supervisory acquisitions.




Federal
Securities Laws.The stock of Community Financial is
registered with the SEC under the Securities Exchange Act of 1934, as
amended.  Community Financial is subject to the information,






26


proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Securities Exchange Act of 1934.




The SEC
and the NASDAQ have adopted regulations and policies under the Sarbanes-Oxley
Act of 2002 that apply to Community Financial as a registered company under the
Securities Exchange Act of 1934 and a NASDAQ-traded company.  The
stated goals of these Sarbanes-Oxley requirements are to increase corporate
responsibility, provide for enhanced penalties for accounting and auditing
improprieties at publicly traded companies and to protect investors by improving
the accuracy and reliability of corporate disclosures pursuant to the securities
laws.  The SEC and NASDAQ Sarbanes-Oxley-related regulations and
policies include very specific additional disclosure requirements and corporate
governance rules.  The Sarbanes-Oxley Act represents significant
federal involvement in matters traditionally left to state regulatory systems,
such as the regulation of the accounting profession, and to state corporate law,
such as the relationship between a board of directors and management and between
a board of directors and its committees.




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, 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 is now actual
net charge-offs. 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, 2008, Community
Bank’s had no excess reserves to be recaptured.




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).




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. In the opinion
of management, any examination of still open returns (including returns of
subsidiaries and predecessors of, or entities merged into,
Community






27


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.




P. Douglas
Richard, age 64,
is President and Chief Executive Officer of the Company. He was appointed to
those positions in April, 2000 and prior to those appointments he was a Senior
Vice President and Regional President of the Hampton Roads division. Prior to
joining the Company in 1997, Mr. Richard was Chief Executive Officer of Seaboard
Savings Bank in Virginia Beach, Virginia.




R. Jerry
Giles, age 59, is our Chief Financial Officer and Senior Vice President,
a position he has held since April 1994. Prior to joining the Company in April
1994, Mr. Giles was a Certified Public Accountant in public accounting and the
Chief Financial Officer with a savings bank for eleven years.




Chris P.
Kyriakides, age 45, is our Senior 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, age 59,
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, age 46, was
appointed President of Community Bank in March, 2008. He was previously the
Chief Lending Officer and Senior Vice President. Prior to joining the Company in
April 1996, Mr. Smiley was a Branch Manager for First Virginia where he was
employed for 14 years.




Employees




At March
31, 2008, we had a total of 134 employees, including 28 hourly employees. None
of our employees are represented by any collective bargaining group. Management
considers our employee relations to be good




ITEM
1B.  UNRESOLVED STAFF COMMENTS




None.




28


ITEM  2.  PROPERTIES




The
following table sets forth information at March 31, 2008, with respect to our
offices, furniture and equipment.  We believe that our current
facilities are adequate to meet our present and foreseeable need.




Location
            Opened
            Owned
      or
              Lease
              Expiration
            
            Gross
      Square
              Footage
            
            
            Net
      Book Value
              at
      March 31,
              200838
      North Central Avenue
              Staunton,
      Virginia
            1965
            Owned
            
            
            17,000
            
            
            $
            1,187,000Rte
      250 West
              Waynesboro,
      Virginia
            1989
            Owned
            
            
            5,300
            
            
            
            586,000Route
      340 and 608
              Stuarts
      Draft, Virginia
            1993
            Owned
            
            
            3,000
            
            
            
            940,000621
      Nevan Road
              Virginia
      Beach, Virginia
            1998
            2038
            
            
            13,000
            
            
            
            854,000101
      Community Way
              Staunton,
      Virginia
            1999
            2039
            
            
            4,500
            
            
            
            558,0002134
      Raphine Road,
              Raphine,
      Virginia
            2001
            2011
            
            
            2,308
            
            
            
            53,00021
      Dick Huff Lane
              Verona,
      Virginia
            2002
            Owned
            
            
            3,850
            
            
            
            1,260,000123
      West Frederick Street
              Staunton,
      Virginia
            2003
            Owned
            
            
            22,000
            
            
            
            1,587,0001201
      Lake James Drive
              Virginia
      Beach, Virginia
            2005
            2012
            
            
            3,900
            
            
            
            287,000463
      Hidden Creek Lane
              Harrisonburg,
      Virginia
            2005
            2008
            
            
            2,000
            
            
            
            62,000102
      Walker Street
              Lexington,
      Virginia
            2006
            2028
            
            
            2,200
            
            
            
            274,000211
      West Frederick Street
              Staunton,
      Virginia
            2008
            Owned
            
            
            4,445
            
            
            
            275,000





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, 2008 was
$242,610.






29


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, 2008.






PART
II




ITEM
5.  MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND  ISSUER PURCHASES OF EQUITY SECURITIES




As of May
31, 2008, there were approximately 449 holders of record of Community Financial
common stock.  Community Financial common stock is traded on The
Nasdaq Capital Market under the symbol “CFFC.”  The number of
shareholders of record does not reflect persons or entities who hold their stock
in nominee or “street” name.




The
following tables present the high, low and closing sales prices of our common
stock as reported by the Nasdaq Stock Market during the last two fiscal years
and the dividends declared by us for the stated periods. All information for the
periods presented has been retroactively restated to reflect the stock split
declared July 26, 2006.




Fiscal
      2008
            
            High
            
            
            Low
            
            
            Close
            
            
            Dividend
      DeclaredMarch
      2008
            
            $
            9.09
            
            
            $
            7.03
            
            
            $
            8.00
            
            
            $
            .065December
      2007
            
            
            10.40
            
            
            
            8.37
            
            
            
            8.99
            
            
            
            .065September
      2007
            
            
            11.00
            
            
            
            9.20
            
            
            
            9.30
            
            
            
            .065June
      2007
            
            
            11.89
            
            
            
            11.00
            
            
            
            11.43
            
            
            
            .065Fiscal
      2007
            
            High
            
            
            Low
            
            
            Close
            
            
            Dividend
      DeclaredMarch
      2007
            
            $
            12.75
            
            
            $
            11.05
            
            
            $
            11.75
            
            
            $
            .065December
      2006
            
            
            12.50
            
            
            
            11.00
            
            
            
            11.72
            
            
            
            .065September
      2006
            
            
            12.97
            
            
            
            10.59
            
            
            
            11.81
            
            
            
            .065June
      2006
            
            
            12.03
            
            
            
            10.94
            
            
            
            11.70
            
            
            
            .060







The Board
of Directors of Community Financial makes dividend payment decisions with
consideration of a variety of factors, including earnings, financial condition,
market considerations and regulatory restrictions.  Our ability to pay
dividends is limited by restrictions imposed by the Virginia Stock Corporation
Act, and indirectly, by the Office of Thrift
Supervision.  Restrictions on dividend payments from Community Bank to
Community Financial (Community Financial’s primary source of funds for the
payment of dividends to its stockholders) are described in Note 10 of the Notes
to Consolidated Financial Statements contained in Item 8 of this Form
10-K.




The
Equity Compensation Plan information contained in Item 13 of this Form 10-K is
incorporated herein by reference.  No stock was repurchased by the
Company during the fourth quarter of fiscal 2008.




30




The following graph compares the
performance of the Company’s common stock with The Nasdaq Stock Market Index and
the Hemscott Savings and Loan Group Index.   The comparison
assumes $100 was invested on March 31, 2003 in Community Financial common stock
and in each of the foregoing indices and assumes the reinvestment of all
dividends.  Historical stock price performance is not necessarily
indicative of future stock price performance.





Comparison
of Cumulative Total Return


Among
Community Financial Corporation, Nasdaq Market Index


and
Hemscott Savings and Loan Group Index











3/31/03
            
            
            3/31/04
            
            
            3/31/05
            
            
            3/31/06
            
            
            3/30/07
            
            
            3/31/08Community
      Financial Corp VA
            
            $
            100.00
            
            
            $
            143.66
            
            
            $
            151.05
            
            
            $
            152.65
            
            
            $
            165.13
            
            
            $
            115.51Savings
      & Loans
            
            
            100.00
            
            
            
            147.12
            
            
            
            147.48
            
            
            
            162.26
            
            
            
            168.18
            
            
            
            97.99NASDAQ
      Market Index
            
            
            100.00
            
            
            
            149.26
            
            
            
            149.91
            
            
            
            176.74
            
            
            
            183.30
            
            
            
            171.69





31


ITEM
6. SELECTED FINANCIAL DATA




At
      March 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(In
      thousands)Selected Financial Condition
      Data:Total
      assets
            
            $
            491,246
            
            
            $
            463,112
            
            
            $
            422,606
            
            
            $
            399,604
            
            
            $
            336,947Loans
      receivable,
      net
            
            
            437,174
            
            
            
            399,252
            
            
            
            358,714
            
            
            
            336,809
            
            
            
            279,301Investment
      securities and other earning assets(1)
            
            
            30,475
            
            
            
            43,703
            
            
            
            45,102
            
            
            
            45,911
            
            
            
            39,620Real
      estate owned,
      net
            
            
            593
            
            
            
            181
            
            
            
            120
            
            
            
            138
            
            
            
            621Deposits
            
            
            350,731
            
            
            
            330,538
            
            
            
            306,849
            
            
            
            275,430
            
            
            
            260,231Advances
      and other borrowed money
            
            
            98,834
            
            
            
            90,740
            
            
            
            78,976
            
            
            
            91,650
            
            
            
            46,429Stockholders’
      equity
            
            
            38,705
            
            
            
            38,570
            
            
            
            35,167
            
            
            
            31,325
            
            
            
            29,269Year
      Ended March 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004(In
      thousands)Selected Operations Data:Total
      interest
      income
            
            $
            32,244
            
            
            $
            29,419
            
            
            $
            24,466
            
            
            $
            20,038
            
            
            $
            17,524Total
      interest
      expense
            
            
            16,978
            
            
            
            14,792
            
            
            
            10,312
            
            
            
            6,281
            
            
            
            5,542Net
      interest
      income
            
            
            15,266
            
            
            
            14,627
            
            
            
            14,154
            
            
            
            13,757
            
            
            
            11,982Provision
      for loan
      losses
            
            
            625
            
            
            
            388
            
            
            
            177
            
            
            
            870
            
            
            
            846Net
      interest income after provision for
              loan
      losses
            
            
            14,641
            
            
            
            14,239
            
            
            
            13,977
            
            
            
            12,887
            
            
            
            11,136Service
      charges and
      fees
            
            
            3,007
            
            
            
            2,816
            
            
            
            2,557
            
            
            
            2,293
            
            
            
            2,683Gain
      on sale of
      subsidiary
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            ---
            
            
            
            241Other
      noninterest income(2)
            
            
            336
            
            
            
            369
            
            
            
            444
            
            
            
            415
            
            
            
            301Noninterest
      expenses
            
            
            12,292
            
            
            
            11,306
            
            
            
            10,791
            
            
            
            10,060
            
            
            
            9,684Income
      before income taxes
            
            
            5,692
            
            
            
            6,118
            
            
            
            6,187
            
            
            
            5,535
            
            
            
            4,677Income
      taxes
            
            
            1,856
            
            
            
            2,027
            
            
            
            1,919
            
            
            
            1,729
            
            
            
            1,195Net
      income
            
            $
            3,836
            
            
            $
            4,091
            
            
            $
            4,268
            
            
            $
            3,806
            
            
            $
            3,482At
      or For the Year Ended March 31,2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Other Data:Average
      interest-earning assets
              to
      average interest bearing liabilities
            
            
            105.21
            %
            
            
            104.86
            %
            
            
            104.81
            %
            
            
            104.81
            %
            
            
            106.57
            %Average
      interest rate spread during year
            
            
            3.14
            
            
            
            3.30
            
            
            
            3.51
            
            
            
            3.84
            
            
            
            3.86Non-performing
      assets to total assets
            
            
            .33
            
            
            
            .32
            
            
            
            .14
            
            
            
            .14
            
            
            
            .51Return
      on assets (ratio of net income to
              average
      total
      assets)
            
            
            .80
            
            
            
            .92
            
            
            
            1.04
            
            
            
            1.04
            
            
            
            1.12Return
      on equity (ratio of net income to
              average
      total
      equity)
            
            
            9.77
            
            
            
            11.06
            
            
            
            12.79
            
            
            
            12.56
            
            
            
            12.45Equity-to-assets
      ratio (ratio of average
              equity
      to average assets)
            
            
            8.18
            
            
            
            8.36
            
            
            
            8.16
            
            
            
            8.28
            
            
            
            9.31Allowance
      for loan losses to total loans
            
            
            .73
            
            
            
            .77
            
            
            
            .82
            
            
            
            .89
            
            
            
            .94Allowance
      for loan losses to non-performing
              loans
            
            
            313.30
            
            
            
            234.16
            
            
            
            503.57
            
            
            
            551.28
            
            
            
            152.60Per Share Data: (3)Net
      income-diluted
            
            $
            0.87
            
            
            $
            0.93
            
            
            $
            .98
            
            
            $
            .88
            
            
            $
            .82Book
      value
            
            
            8.93
            
            
            
            8.98
            
            
            
            8.29
            
            
            
            7.51
            
            
            
            7.04Dividends
            
            
            .260
            
            
            
            .255
            
            
            
            .225
            
            
            
            .210
            
            
            
            .195Dividend
      payout
      ratio
            
            
            29.22
            %
            
            
            26.54
            %
            
            
            22.13
            %
            
            
            22.97
            %
            
            
            23.22
            %Number
      of full-service offices
            
            
            10
            
            
            
            10
            
            
            
            9
            
            
            
            8
            
            
            
            8


____________________


(1)           Includes
federal funds sold, securities purchased under resale agreements and overnight
deposits.


(2)           Other
income includes customer service fees and commissions, gain or loss on disposal
of property and other items.


(3)
            Per
      share data for the periods presented has been restated to reflect the
      2-for-1 stock split declared on July 26, 2006, as
    applicable.







32




ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS




Executive
Overview




Community
Financial Corporation is a Virginia corporation. Certain of the information
presented herein relates to Community Bank, a wholly owned subsidiary of
Community Financial.  Community Financial and Community Bank, like all
thrift institutions and their holding companies, are subject to comprehensive
regulation, examination and supervision by the Office of Thrift Supervision and
the Federal Deposit Insurance Corporation.




The
following information is intended to provide investors a better understanding of
our financial position and the operating results of Community Financial
Corporation and its subsidiary, Community Bank. This discussion is primarily
from management’s perspective and may not contain all information that is of
importance to the reader. Accordingly, the information should be considered in
the context of the consolidated financial statements and other related
information contained herein.




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




The
primary factor contributing to the increase in net interest income for the
fiscal year ended March 31, 2008 was the growth in interest-earning assets,
primarily loans, partially offset by a decreasing interest rate spread resulting
both from the reduced difference (flat interest rate curve) between short and
long term interest rates and aggressive rate reductions by the Federal Reserve.
The aggressive rate reductions resulted in a timing difference in the repricing
of assets and liabilities. Management is optimistic concerning an increase in
the interest spread as the difference between short and long term rates has
increased and the scheduled repricing of time deposits and borrowings. We will
monitor the impact a change in interest rates may have on both the growth in
interest-earning assets and our interest rate spread. The pace and extent of
future interest rate changes will impact our loan growth and interest rate
spread, as well as interest rate adjustments on certain adjustable rate loans
that are subject to caps.




Funding
for the growth in interest-earning assets combined with a flat interest rate
curve has impacted the composition of our interest-bearing liabilities. While
both borrowings and deposits increased, deposits were the primary source of
funding during the fiscal year ended March 31, 2008. We were aggressive in our
time deposit and money market pricing during the fiscal year to fund the growth
in our loans.  Management recognizes the need to continue to increase
deposits and was successful in attracting time deposit accounts. While we have
the capacity to continue to utilize borrowings to meet funding needs, management
recognizes the practical long-term limitations of such a funding strategy.






33




Management
is also cognizant of the potential for compression in our net interest margin
related to the need to acquire funds and the pace of interest rate changes.
Management will continue to monitor the level of deposits and borrowings in
relation to the current interest rate environment.




Critical
Accounting Policies




General.  Our
financial statements are prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”). The financial information
contained within our financial statements is, to a significant extent, financial
information that is based on measures of the financial effects of transactions
and events that have already occurred. A variety of factors could affect the
ultimate value that is obtained either when earning income, recognizing an
expense, recovering an asset or relieving a liability. We use historical loss
factors as one factor in determining the inherent loss that may be present in
our loan portfolio. Actual losses could differ significantly from the historical
factors that we use. In addition, GAAP itself may change from one previously
acceptable method to another method. Although the economics of our transactions
would be the same, the timing of events that would impact our transactions could
change.




Allowance for
Loan Losses.The allowance for loan losses is an estimate of
the losses that may be sustained in our loan portfolio. The allowance is based
on two basic principles of accounting: (i) Statement of Financial Accounting
Standard ("SFAS") No.5, Accounting for Contingencies, which requires that losses
be accrued when they are probable of occurring and estimable and (ii) SFAS No.
114, Accounting by Creditors for Impairment of a Loan, which requires that
losses be accrued based on the differences between the value of collateral,
present value of future cash flows or values that are observable in the
secondary market, and the loan balance.




The
allowance for loan losses is maintained at a level considered by management to
be adequate to absorb future loan losses currently inherent in the loan
portfolio.  Management's assessment of the adequacy of the allowance
is based upon type and volume of the loan portfolio, past loan loss experience,
existing and anticipated economic conditions, and other factors which deserve
current recognition in estimating future loan losses.  This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.  Additions
to the allowance are charged to operations.  Subsequent recoveries, if
any, are credited to the allowance.  Loans are charged-off partially
or wholly at the time management determines collectibility is not
probable.  Management's assessment of the adequacy of the allowance is
subject to evaluation and adjustment by our regulators.




The
allowance consists of specific, general and unallocated
components.  The specific component relates to loans that are
classified as either doubtful, substandard or special mention.  For
such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value of that
loan.  The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors.  An
unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses.  The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.




A loan is
considered impaired when, based on current information and events, it is
probable that we will be unable to collect the scheduled payments of principal
or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally






34


are not
classified as impaired.  Management determines the significance of
payment delays and payment shortfalls on a case-by-case basis, taking into
consideration all of the circumstances surrounding the loan and the borrower,
including the length of the delay, the reasons for the delay, the borrower’s
prior payment record, and the amount of the shortfall in relation to the
principal and interest owed.  Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value of
expected future cash flows discounted at the loan’s effective interest rate, the
loan’s obtainable market price, or the fair value of the collateral if the loan
is collateral dependent.




Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, we do not separately identify individual
consumer and residential loans for impairment disclosures, unless such loans are
the subject of a restructuring agreement.




Asset/Liability
Management




Management
believes it is important to manage the relationship between interest rates and
the effect on our net portfolio value.  This approach calculates the
difference between the present value of expected cash flows from assets and the
present value of expected cash flows from liabilities, as well as cash flows
from off-balance sheet contracts.  Management of our assets and
liabilities is done within the context of the marketplace, but also within
limits established by the board of directors on the amount of change in net
portfolio value which is acceptable given certain interest rate
changes.




Presented
in the following table, as of March 31, 2008 and 2007, is an analysis of our
interest rate risk as measured by changes in net portfolio value for
instantaneous and sustained parallel shifts in the yield curve and compared to
our board policy limits.  Information is presented in accordance with
Office of Thrift Supervision regulations and based on its
assumptions.  The Board limits have been established with
consideration of the dollar impact of various rate changes and our strong
capital position.  Our net portfolio values at March 31, 2008 were
within the parameters set by the Board of Directors.  As illustrated
in the table, net portfolio value is not significantly impacted by rising or
falling rates as of the date indicated.




March
      31, 2008
            
            
            March
      31, 2007Change
      in
              Interest
      Rate
              (Basis
      Points)
            
            
            Board
      Limit
              NPV
      as %
              of
      Assets
            
            
            $
              Change
              in
      NPV
            
            
            NPV
      as % of Assets
            
            
            $
              Change
              in
      NPV
            
            
            NPV
      as % of Assets(Dollars
      in Thousands)+200
            
            
            
            7
            
            
            
            (4,538
            )
            
            
            9.0
            %
            
            
            (6,048
            )
            
            
            9.5
            %+100
            
            
            
            8
            
            
            
            (2,192
            )
            
            
            9.4
            
            
            
            (2,658
            )
            
            
            10.1-0-
            
            
            
            9
            
            
            
            ---
            
            
            
            9.8
            
            
            
            ---
            
            
            
            10.6-100
            
            
            
            8
            
            
            
            899
            
            
            
            9.9
            
            
            
            2,403
            
            
            
            11.0-200
            
            
            
            7
            
            
            
            1,647
            
            
            
            10.0
            
            
            
            4,105
            
            
            
            11.3





Generally,
management strives to maintain a neutral position regarding interest rate
risk.  In the current interest rate environment, our customers are
interested in obtaining long-term credit products and short-term savings
products.  Management has taken action to counter this
trend.  A significant effort has been made to reduce the duration and
average life of our interest-earning assets. As of March 31, 2008, approximately
71.7% of our gross loan portfolio consisted of loans which reprice during the
life of the loan. We emphasize adjustable-rate mortgage loans and have increased
our portfolio of short-term consumer loans.  Longer term fixed-rate
mortgage loans, 15 to 30 years, are generally referred to other
organizations.






35


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




In
managing our asset/liability mix depending on the relationship between long- and
short-term interest rates, market conditions, and consumer preference, we may
place somewhat greater emphasis on maximizing our net interest income than on
strictly matching the interest rate sensitivity of our assets and liabilities.
We believe the increased net income that may result from an acceptable mismatch
in the actual maturity or repricing of our asset and liability portfolio can
provide sufficient returns to justify the increased exposure to sudden and
unexpected increases in interest rates which may result from such a mismatch. We
have established limits, which may change from time to time, on the level of
acceptable interest rate risk. There can be no assurance, however, that in the
event of an adverse change in interest rates, our efforts to limit interest rate
risk will be successful.




As with
any method of measuring interest rate risk, certain shortcomings are inherent in
the method of analysis presented in the foregoing table.  For example,
although certain assets and liabilities may have similar maturities or periods
to repricing, they may react in different degrees to changes in market interest
rates.  Also, the interest rates on certain types of assets and
liabilities may fluctuate in advance of changes in market interest rates, while
interest rates on other types may lag behind changes in market
rates.  Additionally, certain assets, such as adjustable-rate mortgage
loans, have features which restrict changes in interest rates on a short-term
basis and over the life of the asset. Further, in the event of a change in
interest rates, expected rates of prepayments on loans and early withdrawals
from certificates could likely deviate significantly from those assumed in
calculating the information in the table above.  Finally, the ability
of many borrowers to service their debt may decrease in the event of an interest
rate increase.  We consider all of these factors in monitoring our
exposure to interest rate risk.




36


Average
Balances, Interest Rates and Yields




The
following table sets forth certain information relating to categories of our
interest-earning assets and interest-bearing liabilities for the periods
indicated.  All average balances are computed on a daily
basis.  Non-accruing loans have been included in the table as loans
carrying a zero yield. The yields have not been adjusted for tax
preferences.




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006Average
              Balance
            
            
            Interest
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
            
            
            Yield/
              Cost
            
            
            Average
              Balance
            
            
            Interest
            
            
            Yield/
              Cost(Dollars
      in Thousands)Interest-Earning
      AssetsLoans
            
            $
            417,897
            
            
            $
            30,248
            
            
            
            7.24
            %
            
            $
            377,894
            
            
            $
            27,268
            
            
            
            7.22
            %
            
            $
            345,031
            
            
            $
            22,386
            
            
            
            6.49
            %Investment
      securities and other
              investments
            
            
            41,064
            
            
            
            1,996
            
            
            
            4.86
            %
            
            
            44,321
            
            
            
            2,151
            
            
            
            4.85
            %
            
            
            44,930
            
            
            
            2,080
            
            
            
            4.63
            %Total
      interest-earning assets
            
            
            458,961
            
            
            
            32,244
            
            
            
            7.03
            %
            
            
            422,215
            
            
            
            29,419
            
            
            
            6.97
            %
            
            
            389,961
            
            
            
            24,466
            
            
            
            6.27
            %Non-interest
      earning assets
            
            
            20,959
            
            
            
            
            
            
            
            
            
            
            
            20,261
            
            
            
            
            
            
            
            
            
            
            
            18,883Total
      Assets
            
            $
            479,920
            
            
            
            
            
            
            
            
            
            
            $
            442,476
            
            
            
            
            
            
            
            
            
            
            $
            408,844Interest-Bearing
      LiabilitiesDeposits
            
            $
            337,608
            
            
            
            12,354
            
            
            
            3.66
            %
            
            $
            311,207
            
            
            
            10,047
            
            
            
            3.23
            %
            
            $
            286,266
            
            
            
            6,889
            
            
            
            2.41
            %FHLB
      advances and other
              borrowings
            
            
            98,636
            
            
            
            4,624
            
            
            
            4.69
            %
            
            
            91,454
            
            
            
            4,745
            
            
            
            5.19
            %
            
            
            87,316
            
            
            
            3,423
            
            
            
            3.92
            %Total
      interest-bearing liabilities
            
            
            436,244
            
            
            
            16,978
            
            
            
            3.89
            %
            
            
            402,661
            
            
            
            14,792
            
            
            
            3.67
            %
            
            
            373,582
            
            
            
            10,312
            
            
            
            2.76
            %Non-interest
      bearing Liabilities
            
            
            4,414
            
            
            
            
            
            
            
            
            
            
            
            2,815
            
            
            
            
            
            
            
            
            
            
            
            1,887Total
      Liabilities
            
            
            440,658
            
            
            
            
            
            
            
            
            
            
            
            405,476
            
            
            
            
            
            
            
            
            
            
            
            375,469Stockholder’s
      equity
            
            
            39,262
            
            
            
            
            
            
            
            
            
            
            
            37,000
            
            
            
            
            
            
            
            
            
            
            
            33,375Total
      Liabilities and
              Stockholders’ Equity
            
            $
            479,920
            
            
            
            
            
            
            
            
            
            
            $
            442,476
            
            
            
            
            
            
            
            
            
            
            $
            408,844Net
      interest income
            
            
            
            
            
            $
            15,266
            
            
            
            
            
            
            
            
            
            
            $
            14,627
            
            
            
            
            
            
            
            
            
            
            $
            14,154Interest
      rate spread
            
            
            
            
            
            
            
            
            
            
            3.14
            %
            
            
            
            
            
            
            
            
            
            
            3.30
            %
            
            
            
            
            
            
            
            
            
            
            3.51
            %Net
      interest-earning assets/net yield
              on
      interest-earning assets
            
            $
            22,717
            
            
            
            
            
            
            
            3.33
            %
            
            $
            19,554
            
            
            
            
            
            
            
            3.46
            %
            
            $
            16,379
            
            
            
            
            
            
            
            3.63
            %Percentage
      of interest-earning assets
              to
      interest-bearing liabilities
            
            
            105.21
            %
            
            
            
            
            
            
            
            
            
            
            104.86
            %
            
            
            
            
            
            
            
            
            
            
            104.38
            %







37


Rate/Volume
Analysis




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






Year
      Ended March 31,2008
      v. 2007
            
            
            2007
      v. 2006Increase
              (Decrease)
              Due
      to
              Volume
            
            
            Rate
            
            
            Total
              Increase
              (Decrease)
            
            
            Increase
              (Decrease)
              Due
      to
              Volume
            
            
            Rate
            
            
            Total
              Increase
              (Decrease)(Dollars
      in Thousands)Interest-Earning
      AssetsLoans
            
            $
            2,895
            
            
            $
            85
            
            
            $
            2,980
            
            
            $
            2,371
            
            
            $
            2,511
            
            
            $
            4,882Investment
      securities andother
              investments
            
            
            (158
            )
            
            
            3
            
            
            
            (155
            )
            
            
            (30
            )
            
            
            101
            
            
            
            71Total
      Interest-earningassets
            
            $
            2,737
            
            
            $
            88
            
            
            $
            2,825
            
            
            $
            2,341
            
            
            $
            2,612
            
            
            $
            4,953Interest-Bearing
      LiabilitiesDeposits
            
            $
            966
            
            
            $
            1,341
            
            
            $
            2,307
            
            
            $
            805
            
            
            $
            2,353
            
            
            $
            3,158FHLB
      advances and other
              borrowings
            
            
            337
            
            
            
            (458
            )
            
            
            (121
            )
            
            
            215
            
            
            
            1,107
            
            
            
            1,322Total
      interest-bearingliabilities
            
            $
            1,303
            
            
            $
            883
            
            
            $
            2,186
            
            
            $
            1,020
            
            
            $
            3,460
            
            
            $
            4,480Net
      interest income
            
            
            
            
            
            
            
            
            
            $
            639
            
            
            
            
            
            
            
            
            
            
            $
            473








Financial
Condition




Total
assets increased $28.1 million, or 6.1%, to $491.2 million at March 31, 2008,
primarily as a result of an increase in loans of $37.9 million, offset by a
$25.3 million decrease in investments. The increase in assets was funded by a
$20.2 million, or 6.1%, increase in deposits and a $7.0 million, 7.9% increase
in advances from the Federal Home Loan Bank. The increase in deposits is
reflected primarily in increased time deposits of $21.1 million and money market
accounts of $2.2 million, partially offset by a $3.1 million decrease in
transaction accounts. The change in deposits is related primarily to customers
preference for higher rate time deposits. Management believes the increase in
time and money market deposits is primarily attributable to maintaining
competitive pricing. Management attributes the increase in loans receivable
primarily to excellent customer service and competitive pricing on both mortgage
and consumer loans.




The
Hampton Roads region of the Bank experienced loan growth of $20.1 million,
primarily residential and commercial real estate loans, for the fiscal year
ended 2008. The Shenandoah Valley region of the Bank had loan growth of
approximately $17.8 million, primarily commercial real estate
loans.






38


Asset
quality is an important factor in the successful operation of a financial
institution.  The loss of interest income and principal that may
result from non-performing assets has an adverse effect on earnings, while the
resolution of those assets requires the use of capital and managerial
resources.  At March 31, 2008, total non-performing assets, consisting
of non-performing loans, foreclosed real estate and repossessed automobiles,
were $1.6 million or .33% of total assets compared to $1.5 million or .32% of
total assets at March 31, 2007.   Non-performing assets at March
31, 2008 were comprised primarily of single family residential properties and
commercial real estate delinquent 90 days or more and real estate
owned.  Based on current market values of the collateral securing
these loans, management anticipates no significant losses in excess of the
reserves for losses previously recorded.  Due to an uncertain real
estate market and the economy in general, no assurances can be given that our
level of non-performing assets will not increase in the future.




Stockholders'
equity increased $134,000, or .4%, to $38.7 million at March 31, 2008 compared
to $38.6 million at March 31, 2007. The increase was the result of $3.8 million
of net income, proceeds from option exercises and an adjustment for SFAS No. 158
for the Corporation’s pension liability, partially offset by dividends paid to
stockholders of $1.1 million, and a decrease in the unrealized gain on equity
securities of $2.9 million.




Results
of Operations




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




Comparison
of Years Ended March 31, 2008 and 2007




General.  Net
income for the year ended March 31, 2008 was $3.8 million or $0.87 diluted
earnings per share compared to $4.1 million or $0.93 diluted earnings per share
for the year ended March 31, 2007, a decrease of $255,000 or 6.2%. Net income
decreased due primarily to an increase in noninterest expenses of $986,000 and
an increased provision for loan losses of $237,000.




Interest
Income.  Total interest income increased $2.8 million, or 9.6%,
to $32.2 million for the year ended March 31, 2008 as compared to $29.4 million
for the year ended March 31, 2007. The increase in total interest income can be
attributed to both an increase in the average dollar volume of interest-earning
assets, primarily $40.0 million in loans receivable, and an increase in the
yield on interest earning assets.  Average yields on total
interest-earning assets increased 6 basis points from 6.97% in fiscal 2007 to
7.03% for the current fiscal year primarily due to an increase in higher
yielding commercial loans offset by a decreasing rate environment.




Interest
Expense.  Total interest expense increased $2.2 million, or
14.8%, to $17.0 million for the year ended March 31, 2008 from $14.8 million for
the year ended March 31, 2007. The increase in total interest expense is
attributable to both an increase in the average dollar volume and an increase in
the cost of interest-bearing liabilities, primarily $26.4 million in deposits
and $7.1 million FHLB advances and other borrowings. The cost of funds increased
22 basis points from 3.67% for the year ended March 31, 2007 to 3.89% for the
current year. The increase in deposit balances was due primarily to increases in
time deposits for the current fiscal year.




Provision for
Loan Losses.  We establish provisions for loan losses, which
are charged to earnings, at a level required to reflect credit losses inherent
in the loan portfolio.  In evaluating the level of the allowance for
loan losses, management considers historical loss experience, the types of loans
and the amount of loans in the loan portfolio, adverse situations that may
affect borrowers’ ability to repay,




39


estimated
value of any underlying collateral, peer group data, prevailing economic
conditions, and current factors.  Large groups of smaller balance
homogeneous loans, such as residential real estate, small commercial real
estate, home equity and consumer loans, are evaluated in the aggregate using
historical loss factors adjusted for current economic conditions and other
relevant data.  Larger non-homogeneous loans, such as commercial loans
for which management has concerns about the borrowers’ ability to repay, are
evaluated individually, and specific loss allocations are provided for these
loans when necessary.




In the
current economic environment, management has considered the potential impact of
subprime lending in certain areas of the national economy. These circumstances
do not appear to have significantly impacted economic conditions in our market
areas which to date remain stable. We did not experience significant increases
in either delinquency or charge-off rates during the fiscal year ended March 31,
2008 and we have maintained experienced and stable lending personnel during that
period. We also evaluated our risk in certain lending areas and reduced our
exposure in automobile lending by $6.0 million.




Based on
management’s evaluation of these factors, the provision for loan losses
increased $237,000, or 61.0%, to $625,000 for the fiscal year ended March 31,
2007 from $388,000 for the fiscal year ended March 31, 2007.  The
increase in the provision for fiscal 2008 was due to an increase in the rate of
loan growth and reserves for non-performing assets.We monitor our loan loss
allowance on a quarterly basis and make allocations as
necessary.  Management believes that the level of our loan loss
allowance is adequate. As of March 31, 2008, the total allowance for loan losses
amounted to $3.2 million.  At March 31, 2008, our allowance as a
percentage of total loans receivable was .73% and as a percentage of total
non-performing loans was 313%.




Noninterest
Income.  Noninterest income increased $158,000, or 4.9%, to
$3.3 million in fiscal 2008 as compared to $3.2 million for the year ended March
31, 2007.  The increase in noninterest income was primarily due to
overdraft fees.




Fiscal
      2008
            
            
            Fiscal
      2007
            
            
            ChangeLoan
      fee
      income
            
            
            655,548
            
            
            
            608,937
            
            
            
            46,611Deposit
      fee
      income
            
            
            2,351,277
            
            
            
            2,207,027
            
            
            
            144,250Other
            
            
            336,211
            
            
            
            369,421
            
            
            
            (33,210
            )Total
      noninterest income
            
            $
            3,343,036
            
            
            $
            3,185,385
            
            
            $
            157,651





Noninterest
Expense.  Total noninterest expense increased $986,000, or
8.7%, to $12.3 million for the year ended March 31, 2008 from $11.3 million for
the year ended March 31, 2007, due primarily to increased compensation expense
of $497,000, expenses related to implementing the evaluation and monitoring of
internal controls as required by Section 404 of the Sarbanes-Oxley Act of 2002
of $92,000 and data processing expenses of $185,000. The increase in
compensation expense was related to merit pay increases and the addition of a
loan officer. The increase in data processing was related to the updating of our
software and computer hardware and the addition of one additional computer
person.




Taxes.  Total
taxes decreased $171,000, or 8.4%, to $1.9 million during the year ended March
31, 2008 from $2.0 million during fiscal 2007. The effective tax rate for the
year ended March 31, 2008 was 32.6% compared to 33.1% for fiscal
2007.







40




Comparison
of Years ended March 31, 2007 and 2006




General.  Net
income for the year ended March 31, 2007 was $4.1 million or $0.93 diluted
earnings per share compared to $4.3 million or $0.98 diluted earnings per share
for the year ended March 31, 2006, a decrease of $177,000 or 4.1%. Net income
decreased due primarily to an increase in the noninterest expenses of
$516,000.




Interest
Income.  Total interest income increased $5.0 million, or
20.2%, to $29.4 million for the year ended March 31, 2007 as compared to $24.5
million for the year ended March 31, 2006. The increase in total interest income
can be attributed to both an increase in the average dollar volume of
interest-earning assets, primarily $32.9 million in loans receivable, and an
increase in the yield on interest earning assets.  Average yields on
total interest-earning assets increased 70 basis points from 6.27% in fiscal
2006 to 6.97% for the fiscal year 2007 due primarily to a higher interest rate
environment.




Interest
Expense.  Total interest expense increased $4.5 million, or
43.4%, to $14.8 million for the year ended March 31, 2007 from $10.3 million for
the year ended March 31, 2006. The increase in total interest expense is
attributable to both an increase in the average dollar volume and an increase in
the cost of interest-bearing liabilities, primarily $25.0 million in deposits
and $4.1 million FHLB advances and other borrowings. The cost of funds increased
91 basis points from 2.76% for the year ended March 31, 2006 to 3.67% for the
current year. The increase in deposit balances was due primarily to increases in
time deposits for the fiscal year ended March 31, 2007.




Provision for
Loan Losses.  Based on management’s evaluation, the provision
for loan losses increased $211,000, or 119.3%, to $388,000 for the fiscal year
ended March 31, 2007 from $177,000 for the fiscal year ended March 31,
2006.  The increase in the provision for fiscal 2007 was due to an
increase in the rate of loan growth offset by a decrease in allowances for
certain loan categories based on historical charge-off rates.We monitor our loan loss
allowance on a quarterly basis and make allocations as
necessary.  Management believes that the level of our loan loss
allowance is adequate. As of March 31, 2007, the total allowance for loan losses
amounted to $3.1 million.  At March 31, 2007, our allowance as a
percentage of total loans receivable was .77% and as a percentage of total
non-performing loans was 234%.




Noninterest
Income.  Noninterest income increased $184,000, or 6.1%, to
$3.2 million in fiscal 2007 as compared to $3.0 million for the year ended March
31, 2006.  The increase in noninterest income was primarily due to
overdraft fees.




Fiscal
      2007
            
            
            Fiscal
      2006
            
            
            ChangeLoan
      fee
      income
            
            
            608,937
            
            
            
            532,647
            
            
            
            76,290Deposit
      fee
      income
            
            
            2,207,027
            
            
            
            2,023,878
            
            
            
            183,149Other
            
            
            369,421
            
            
            
            444,547
            
            
            
            (75,126
            )Total
      noninterest income
            
            $
            3,185,385
            
            
            $
            3,001,072
            
            
            $
            184,313





Noninterest
Expense.  Total noninterest expense increased $516,000, or
4.8%, to $11.3 million for the year ended March 31, 2007 from $10.8 million for
the year ended March 31, 2006, due primarily to increased compensation expense
related to the employment of additional commercial loan officers and an
additional branch location.




Taxes.  Total
taxes increased $107,000, or 5.6%, to $2.0 million during the year ended March
31, 2007 from $1.9 million during fiscal 2006. The effective tax rate for the
year ended March 31, 2007 was




41




33.1%
compared to 31.0% for fiscal 2006. The fiscal year 2006 included a tax credit of
approximately $96,000.




Liquidity
and Capital Resources




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




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




Our
dominant source of funds during the year ended March 31, 2008 was from deposits
which increased by $20.2 million and FHLB advances which increased by $7.0
million.  Our cash increased $12.4 million from $3.6 million at March
31, 2007 to $16.0 million at March 31, 2008.  The increase in cash was
related to calls of our held to maturity securities.




At March
31, 2008, we had commitments to purchase or originate $22.0 million of
loans.   Certificates of deposit scheduled to mature in one year
or less at March 31, 2008 totaled $207.0 million. Based on our historical
experience, management believes that a significant portion of such deposits will
remain with us.  Management further believes that loan repayments and
other sources of funds will be adequate to meet our foreseeable short- and
long-term liquidity needs.




At March
31, 2008, we had tangible and core capital of 7.81% of adjusted total assets,
which was in excess of their respective requirements of 1.5% and
4.0%.   We also had risk-based capital of 9.98% of risk weighted
assets, which also exceeded its requirement of 8.0%. The Bank was considered
“adequately capitalized” as of March 31, 2008.  Regulatory capital is
discussed further in Note 10 of the Notes to Consolidated Financial Statements
contained in Item 8 of this report.




Contractual
Obligations and Off-Balance Sheet Arrangements




As of
March 31, 2008, we have not participated in any unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance
or special entities. We do have significant commitments to fund loans in the
ordinary course of business. Such commitments and resulting off-balance sheet
risk are further discussed in Note 14 of the Consolidated Financial Statements
contained in Item 8 of this report.




The
following table presents our contractual cash obligations, excluding deposit
obligations, as of March 31, 2008.




Total
            
            
            Less
      than
              1
      year
            
            
            1-3
              years
            
            
            3-5
              years
            
            
            More
      than
              5
      yearsOperating
      Leases
            
            $
            1,219,676
            
            
            $
            185,261
            
            
            $
            386,881
            
            
            $
            334,193
            
            
            $
            313,341Long-Term
      Debt
            
            
            20,000,000
            
            
            
            ---
            
            
            
            20,000,000
            
            
            
            ---
            
            
            
            ---Total
            
            $
            21,219,676
            
            
            $
            185,261
            
            
            $
            20,386,881
            
            
            $
            334,193
            
            
            $
            313,341







42


Impact
of Inflation and Changing Prices




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




Recent
Accounting Pronouncements




For a
discussion of recent accounting pronouncements implemented by us during fiscal
2008 and new pronouncements which will be implemented in the future, see
“Summary of Accounting Policies” in our Consolidated Financial Statements
contained in Item 8 of this report.




ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK




See
“Management’s Discussion and Analysis of Financial Condition and Results of
Operations – Assset/Liability Management” in Item 7 of this report.




43







ITEM
8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA




Index
to Financial Statements




Page





Report of
Independent Registered Public Accounting
Firm                                                                         
45




Consolidated
Balance Sheets at March 31, 2008 and
2007                                                                            
46




Consolidated
Statements of Income for the




years
ended March 31, 2008, 2007 and
2006                                                                                                 
47




Consolidated
Statements of Stockholders’ Equity for the




years
ended March 31, 2008, 2007 and
2006                                                                                                 
49




Consolidated
Statements of Cash Flows for the




years
ended March 31, 2008, 2007 and
2006                                                                                                
50




Summary
of Accounting
Policies                                                                                                                     
52




Notes to
Consolidated Financial
Statements                                                                                                 
60













44





REPORT
OF INDEPENDENT REGISTERED


PUBLIC
ACCOUNTING FIRM








To the
Board of Directors and Stockholders


Community
Financial Corporation


Staunton,
Virginia





We have
audited the accompanying consolidated balance sheets of Community Financial
Corporation and Subsidiary as of March 31, 2008 and 2007, and the related
consolidated statements of income, stockholders’ equity and cash flows for each
of the three years in the period ended March 31, 2008.  These
financial statements are the responsibility of the Corporation’s
management.  Our responsibility is to express an opinion on these
financial statements based on our audits.





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





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Community Financial
Corporation and Subsidiary as of March 31, 2008 and 2007, and the results
of their operations and their cash flows for each of the three years in the
period ended March 31, 2008, in
conformity with U.S. generally accepted accounting principles.





We were
not engaged to examine management’s assertion about the effectiveness of
Community Financial Corporation and Subsidiary’s internal control over financial
reporting as of March 31, 2008 included in Management’s Annual Report on the
Internal Control Over Financial Reporting and, accordingly, we do not express an
opinion thereon.










Winchester,
Virginia


May 30,
2008




50
South Cameron Street
 P.O. Box 2560
 Winchester, VA 22604
 (540)
662-3417    Offices
located in: Winchester, Middleburg, Leesburg, Culpeper, and Richmond,
Virginia
 FAX (540) 662-4211        Member:
American Institute of Certified Public Accountants / Virginia Society of
Certified Public Accountants




45




Community
Financial Corporation
 and
Subsidiary
 
 Consolidated
Balance Sheets




March
31,
            
            2008
            
            
            2007AssetsCash
      (including interest bearing deposits of $12,762,079and $1,045,270)
            
            $
            15,998,041
            
            
            $
            3,625,796SecuritiesHeld to maturity (fair value
      approximates $2,948,329and
      $23,232,322)
            
            
            2,940,217
            
            
            
            23,585,975Available for sale, at fair
      value
            
            
            9,562,410
            
            
            
            14,250,095Restricted
      investment in Federal Home Loan Bank stock, at cost
            
            
            5,210,800
            
            
            
            4,822,100Loans
      receivable, net of allowance for loan losses of$3,214,771and
      $3,078,397
            
            
            437,173,797
            
            
            
            399,252,394Real
      estate owned, net
            
            
            592,609
            
            
            
            181,212Property
      and equipment, net
            
            
            7,923,481
            
            
            
            8,021,271Accrued
      interest receivable
            
            
            2,079,073
            
            
            
            2,232,265Prepaid
      expenses and other assets
            
            
            9,765,345
            
            
            
            7,141,113Total
      assets
            
            $
            491,245,773
            
            
            $
            463,112,221Liabilities and Stockholders’
      EquityLiabilitiesDeposits
            
            $
            350,730,834
            
            
            $
            330,537,704Advances from Federal Home Loan
      Bank
            
            
            96,000,000
            
            
            
            89,000,000Securities sold under agreements
      to repurchase
            
            
            2,834,412
            
            
            
            1,739,690Advance payments by borrowers for
      taxes and insurance
            
            
            150,545
            
            
            
            142,511Other liabilities
            
            
            2,825,279
            
            
            
            3,121,904Total
      liabilities
            
            
            452,541,070
            
            
            
            424,541,809Commitments
      and Contingencies
            
            
            -
            
            
            
            -Stockholders’
      EquityPreferred stock, $.01 par value,
      authorized 3,000,000shares, none
      outstanding
            
            
            -
            
            
            
            -Common stock, $.01 par value,
      10,000,000 authorizedshares, 4,335,958and 4,295,732
      shares outstanding
            
            
            43,360
            
            
            
            42,957Additional paid-in
      capital
            
            
            5,391,704
            
            
            
            5,097,321Retained earnings
            
            
            34,992,515
            
            
            
            32,277,332Accumulated other comprehensive
      income (loss), net
            
            
            (1,722,876
            )
            
            
            1,152,802Total
      stockholders’ equity
            
            
            38,704,703
            
            
            
            38,570,412Total
      liabilities and stockholders’ equity
            
            $
            491,245,773
            
            
            $
            463,112,221


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








46


Community
Financial Corporation
 and
Subsidiary
 
 Consolidated
Statements of Income


Year Ended March
      31,
            
            2008
            
            
            2007
            
            
            2006Interest
      and dividend incomeLoans
            
            $
            30,247,693
            
            
            $
            27,268,394
            
            
            $
            22,385,916Investment
    securities
            
            
            827,673
            
            
            
            1,012,695
            
            
            
            1,055,833Other investments
            
            
            1,168,394
            
            
            
            1,138,199
            
            
            
            1,024,684Total
      interest and dividend income
            
            
            32,243,760
            
            
            
            29,419,288
            
            
            
            24,466,433Interest
      expenseDeposits
            
            
            12,354,281
            
            
            
            10,047,423
            
            
            
            6,888,553Borrowed money
            
            
            4,623,819
            
            
            
            4,744,520
            
            
            
            3,423,542Total
      interest expense
            
            
            16,978,100
            
            
            
            14,791,943
            
            
            
            10,312,095Net
      interest income
            
            
            15,265,660
            
            
            
            14,627,345
            
            
            
            14,154,338Provision
      for loan losses
            
            
            624,717
            
            
            
            388,074
            
            
            
            176,942Net
      interest income after provision forloan losses
            
            
            14,640,943
            
            
            
            14,239,271
            
            
            
            13,977,396Noninterest
      incomeService charges, fees and
      commissions
            
            
            3,006,825
            
            
            
            2,815,964
            
            
            
            2,556,525Other
            
            
            336,211
            
            
            
            369,421
            
            
            
            444,547Total
      noninterest income
            
            
            3,343,036
            
            
            
            3,185,385
            
            
            
            3,001,072Noninterest
      expenseCompensation and employee
      benefits
            
            
            7,291,661
            
            
            
            6,794,357
            
            
            
            6,364,222Occupancy
            
            
            1,450,116
            
            
            
            1,431,263
            
            
            
            1,392,249Data processing
            
            
            1,406,813
            
            
            
            1,222,229
            
            
            
            1,195,329Advertising
            
            
            438,815
            
            
            
            393,640
            
            
            
            423,242Professional fees
            
            
            448,725
            
            
            
            218,316
            
            
            
            239,112Deposit insurance
            
            
            38,851
            
            
            
            37,370
            
            
            
            37,242Other
            
            
            1,217,551
            
            
            
            1,209,700
            
            
            
            1,139,772Total
      noninterest expense
            
            
            12,292,532
            
            
            
            11,306,875
            
            
            
            10,791,168







47




Community
Financial Corporation
 and
Subsidiary
 
 Consolidated
Statements of Income
 (continued)


Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Income
      before income taxes
            
            $
            5,691,447
            
            
            $
            6,117,781
            
            
            $
            6,187,300Income
      taxes
            
            
            1,855,625
            
            
            
            2,026,573
            
            
            
            1,919,568Net
      income
            
            $
            3,835,822
            
            
            $
            4,091,208
            
            
            $
            4,267,732Earnings
      per shareBasic
            
            $
            0.89
            
            
            $
            0.96
            
            
            $
            1.02Diluted
            
            $
            0.87
            
            
            $
            0.93
            
            
            $
            0.98


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







48




Community
Financial Corporation
 and
Subsidiary
 
 Consolidated
Statements of Stockholders' Equity


AccumulatedAdditional
            
            
            
            
            
            Other
      Compre-
            
            
            TotalCommon
            
            
            Paid-in
            
            
            Retained
            
            
            hensive
      Income
            
            
            Stockholders’Stock
            
            
            Capital
            
            
            Earnings
            
            
            (Loss),
      Net
            
            
            EquityBalance,
      March 31, 2005
            
            $
            20,851
            
            
            $
            4,292,815
            
            
            $
            25,948,758
            
            
            $
            1,062,660
            
            
            $
            31,325,084Comprehensive
      income:Net income
            
            
            -
            
            
            
            -
            
            
            
            4,267,732
            
            
            
            -
            
            
            
            4,267,732Change in unrealized
      gainon available for
    salesecurities, net of
      tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            28,811
            
            
            
            28,811Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,296,543Cash
      dividends, $.225 per share
            
            
            -
            
            
            
            -
            
            
            
            (944,549
            )
            
            
            -
            
            
            
            (944,549
            )Exercise
      of stock options
            
            
            360
            
            
            
            489,311
            
            
            
            -
            
            
            
            -
            
            
            
            489,671Balance,
      March 31, 2006
            
            
            21,211
            
            
            
            4,782,126
            
            
            
            29,271,941
            
            
            
            1,091,471
            
            
            
            35,166,749Comprehensive
      income:Net income
            
            
            -
            
            
            
            -
            
            
            
            4,091,208
            
            
            
            -
            
            
            
            4,091,208Change in unrealized
      gainon available for
    salesecurities, net of
      tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            443,390
            
            
            
            443,390Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,534,598Adjustment
      to initially applySFAS
      No. 158, net of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (382,059
            )
            
            
            (382,059
            )Cash
      dividends, $.255 per share
            
            
            -
            
            
            
            -
            
            
            
            (1,085,817
            )
            
            
            -
            
            
            
            (1,085,817
            )Exercise
      of stock options
            
            
            509
            
            
            
            336,432
            
            
            
            -
            
            
            
            -
            
            
            
            336,941Stock
      split
            
            
            21,237
            
            
            
            (21,237
            )
            
            
            -
            
            
            
            -
            
            
            
            -Balance,
      March 31, 2007
            
            
            42,957
            
            
            
            5,097,321
            
            
            
            32,277,332
            
            
            
            1,152,802
            
            
            
            38,570,412Comprehensive
      income:Net income
            
            
            -
            
            
            
            -
            
            
            
            3,835,822
            
            
            
            -
            
            
            
            3,835,822Change in unrealized
      gain(loss) on available for
      salesecurities, net of
      tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,888,476
            )
            
            
            (2,888,476
            )Pension
      liability adjustment,net
      of tax
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            12,798
            
            
            
            12,798Total
      comprehensive income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            960,144Cash
      dividends, $.260 per share
            
            
            -
            
            
            
            -
            
            
            
            (1,120,639
            )
            
            
            -
            
            
            
            (1,120,639
            )Exercise
      of stock options
            
            
            483
            
            
            
            375,042
            
            
            
            -
            
            
            
            -
            
            
            
            375,525Repurchase
      of common stock
            
            
            (80
            )
            
            
            (80,659
            )
            
            
            -
            
            
            
            -
            
            
            
            (80,739
            )Balance,
      March 31, 2008
            
            $
            43,360
            
            
            $
            5,391,704
            
            
            $
            34,992,515
            
            
            $
            (1,722,876
            )
            
            $
            38,704,703


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




49


Community
Financial Corporation
 and
Subsidiary
 
 Consolidated
Statements of Cash Flows


Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Operating
      activitiesNet income
            
            $
            3,835,822
            
            
            $
            4,091,208
            
            
            $
            4,267,732Adjustments to reconcile net
      income tonet cash provided by operating
      activitiesProvision for loan
      losses
            
            
            624,717
            
            
            
            388,074
            
            
            
            176,942Depreciation
            
            
            613,008
            
            
            
            594,548
            
            
            
            563,732Amortization of premium and
      accretionof discount on securities,
      net
            
            
            5,758
            
            
            
            9,675
            
            
            
            10,215(Increase) decrease in net
      deferred loanorigination costs
            
            
            115,508
            
            
            
            (64,276
            )
            
            
            (134,423
            )Deferred income tax
      (benefit)
            
            
            (155,330
            )
            
            
            (184,604
            )
            
            
            (66,960
            )(Increase) in other
      assets
            
            
            (532,555
            )
            
            
            (536,054
            )
            
            
            (531,522
            )Increase (decrease) in other
      liabilities
            
            
            (288,591
            )
            
            
            1,033,436
            
            
            
            416,743Net
      cash provided by operating activities
            
            
            4,218,337
            
            
            
            5,332,007
            
            
            
            4,702,459Investing
      activitiesProceeds from maturities of held
      tomaturity
    securities
            
            
            21,140,000
            
            
            
            1,875,000
            
            
            
            1,150,000Proceeds from redemption of
      availablefor sale
    securities
            
            
            28,852
            
            
            
            4,125
            
            
            
            4,123Purchase of held to maturity
      securities
            
            
            (500,000
            )
            
            
            -
            
            
            
            -Net increase in
    loans
            
            
            (39,508,792
            )
            
            
            (40,923,574
            )
            
            
            (21,948,107
            )Purchase of property and
      equipment
            
            
            (515,218
            )
            
            
            (400,769
            )
            
            
            (932,837
            )Proceeds from sale of real estate
      owned
            
            
            435,767
            
            
            
            -
            
            
            
            18,245Purchase of FHLB
    stock
            
            
            (388,700
            )
            
            
            (471,800
            )
            
            
            (121,600
            )Net
      cash (used in)investing
      activities
            
            
            (19,308,091
            )
            
            
            (39,917,018
            )
            
            
            (21,830,176
            )







50




Community
Financial Corporation
 and
Subsidiary
 
 Consolidated
Statements of Cash Flows
 (continued)


Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Financing
      activitiesNet increase in certificates of
      deposit
            
            $
            21,090,110
            
            
            $
            28,930,995
            
            
            $
            32,536,369Net (decrease) in savings
      andchecking deposits
            
            
            (896,980
            )
            
            
            (5,241,836
            )
            
            
            (1,118,212
            )Proceeds from issuance of common
      stock
            
            
            375,525
            
            
            
            336,941
            
            
            
            489,671Repurchase
      of common stock
            
            
            (80,739
            )
            
            
            -
            
            
            
            -Increase (decrease) in securities
      sold underagreements to
      repurchase
            
            
            1,094,722
            
            
            
            763,263
            
            
            
            (14,674,070
            )Dividends paid
            
            
            (1,120,639
            )
            
            
            (1,085,817
            )
            
            
            (944,549
            )Proceeds from FHLB advances,
      net
            
            
            7,000,000
            
            
            
            11,000,000
            
            
            
            2,000,000Net
      cash provided by financing activities
            
            
            27,461,999
            
            
            
            34,703,546
            
            
            
            18,289,209Increase
      in cash and cash equivalents
            
            
            12,372,245
            
            
            
            118,535
            
            
            
            1,161,492Cash and cash
      equivalents – beginning of year
            
            
            3,625,796
            
            
            
            3,507,261
            
            
            
            2,345,769Cash and cash
      equivalents – end of year
            
            $
            15,998,041
            
            
            $
            3,625,796
            
            
            $
            3,507,261Supplemental
      Disclosure of Cash FlowInformationCash
      payments of interest expense
            
            $
            17,409,308
            
            
            $
            13,613,522
            
            
            $
            10,467,694Cash
      payments of income taxes
            
            $
            1,806,188
            
            
            $
            2,500,620
            
            
            $
            1,618,184Supplemental
      Schedule of Non-CashInvesting and Financing
      ActivitiesNet
      change in unrealized gain (loss) onsecurities
      available for sale
            
            $
            (4,658,833
            )
            
            $
            715,145
            
            
            $
            46,470Pension
      liability adjustment
            
            $
            14,788
            
            
            $
            (610,368
            )
            
            $
            -Transfers
      from loans to real estate acquiredthrough
foreclosure
            
            $
            847,164
            
            
            $
            61,343
            
            
            $
            -


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






51





Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies




Principles
of Consolidation





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





Stock
Split





On July
26, 2006, the Corporation declared a 2-for-1 stock split payable on August 23,
2006.  All per share information for all periods presented has been
retroactively restated to reflect the stock split.





Nature
of Business and Regulatory Environment





The Bank
is a federally chartered savings association and the primary asset of the
Corporation.  The Bank provides a full range of banking services to
individual and corporate customers primarily in the Shenandoah Valley and
Hampton Roads regions of Virginia through its wholly-owned
subsidiary.





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





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





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





Estimates





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





Cash
and Cash Equivalents





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








52


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)




Securities





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





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





Purchase
premiums and discounts are recognized in interest income using the interest
method over the terms of the securities.  Declines in the fair value
of held to maturity and available for sale securities below their cost that are
deemed to be other than temporary are reflected in earnings as realized
losses.  Management evaluates securities for other than temporary
impairment on a quarterly basis, and more frequently when economic or market
concerns warrant such evaluation.  In estimating other than temporary
impairment losses, management considers (1) the length of time and the extent to
which the fair value has been less than cost, (2) the financial condition and
near-term prospects of the issuer, and (3) the intent and ability of the
Corporation to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.  Gains
and losses on the sale of securities are recorded on the trade date and are
determined using the specific identification method.





Loans
Receivable





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





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





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








53


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)
 
  Allowance for Loan
Losses





The
allowance for loan losses is maintained at a level considered by management to
be adequate to absorb future loan losses currently inherent in the loan
portfolio.  Management's assessment of the adequacy of the allowance
is based upon type and volume of the loan portfolio, past loan loss experience,
existing and anticipated economic conditions, and other factors which deserve
current recognition in estimating future loan losses.  This evaluation
is inherently subjective as it requires estimates that are susceptible to
significant revision as more information becomes available.  Additions
to the allowance are charged to operations.  Subsequent recoveries, if
any, are credited to the allowance.  Loans are charged-off partially
or wholly at the time management determines collectibility is not
probable.  Management's assessment of the adequacy of the allowance is
subject to evaluation and adjustment by the Corporation's
regulators.





The
allowance consists of specific, general and unallocated
components.  The specific component relates to loans that are
classified as either doubtful, substandard or special mention.  For
such loans that are also classified as impaired, an allowance is established
when the discounted cash flows (or collateral value or observable market price)
of the impaired loan is lower than the carrying value of that
loan.  The general component covers non-classified loans and is based
on historical loss experience adjusted for qualitative factors.  An
unallocated component is maintained to cover uncertainties that could affect
management’s estimate of probable losses.  The unallocated component
of the allowance reflects the margin of imprecision inherent in the underlying
assumptions used in the methodologies for estimating specific and general losses
in the portfolio.





A loan is
considered impaired when, based on current information and events, it is
probable that the Corporation will be unable to collect the scheduled payments
of principal or interest when due according to the contractual terms of the loan
agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting
scheduled principal and interest payments when due. Loans that experience
insignificant payment delays and payment shortfalls generally are not classified
as impaired.  Management determines the significance of payment delays
and payment shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the length of
the delay, the reasons for the delay, the borrower’s prior payment record, and
the amount of the shortfall in relation to the principal and interest
owed.  Impairment is measured on a loan-by-loan basis for commercial
and construction loans by either the present value of expected future cash flows
discounted at the loan’s effective interest rate, the loan’s obtainable market
price, or the fair value of the collateral if the loan is collateral
dependent.





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





54


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)
 
  Real Estate Owned





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





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





Property
and Equipment





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





Income
Taxes





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





When tax
returns are filed, it is highly certain that some positions taken would be
sustained upon examination by the taxing authorities, while others are subject
to uncertainty about the merits of the position taken or the amount of the
position that would be ultimately sustained.  The benefit of a tax
position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not
that the position will be sustained upon examination, including the resolution
of appeals or litigation processes, if any.  Tax positions taken are
not offset or aggregated with other positions.  Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest
amount of tax benefit that is more than 50 percent likely of being realized upon
settlement with the applicable taxing authority.  The portion of the
benefits associated with tax positions taken that exceeds the amount measured as
described above is reflected as a liability for unrecognized tax benefit in the
accompanying balance sheet along with any associated interest and penalties that
would be payable to the taxing authorities upon examination.  Interest
and penalties associated with unrecognized tax benefits are classified as
additional income taxes in the statement of income.





55


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)
 
  Earnings Per Share





Basic
earnings per share represents income available to common shareholders divided by
the weighted-average number of common shares outstanding during the
period.  Diluted earnings per share reflects additional common shares
that would have been outstanding if dilutive potential common shares had been
issued, as well as any adjustment to income that would result from the assumed
issuance.  Potential common shares that may be issued by the
Corporation relate solely to outstanding stock options and are determined using
the treasury stock method.





Stock-Based
Compensation Plan





Effective
April 1, 2006, the Corporation adopted SFAS 123 (revised 2004) "Share-Based
Payment."  SFAS 123R requires the costs resulting from all share-based
payments be recognized in the financial statements.  Share-based
compensation is estimated at the date of grant using the Black-Scholes option
valuation model for determining fair value.  Prior to adopting SFAS
123R, the Corporation accounted for the plan under the recognition and
measurement principles of APB Opinion 25, "Accounting for Stock Issued to
Employees," and related Interpretations.  No stock-based employee
compensation cost was reflected in net income, as all options granted under the
plan had an exercise price equal to the market value of the underlying common
stock on the date of grant.





Advertising
Costs





The
Corporation follows the policy of charging the costs of advertising to expense
as incurred.





Comprehensive
Income





Accounting
principles generally require that recognized revenue, expenses, gains and losses
be included in net income.  Although certain changes in assets and
liabilities, such as unrealized gains and losses on available for sale
securities and pension liability adjustments, are reported as a separate
component of the equity section of the balance sheet, such items, along with net
income are components of comprehensive income.





Reclassifications





Certain
reclassifications have been made to prior period balances to conform to the
current year presentation.




56


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)
 
  Recent Accounting
Pronouncements





In
September 2006, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 157, “Fair Value Measurements” (SFAS
157).  SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements.  SFAS 157 does not require
any new fair value measurements, but rather, provides enhanced guidance to other
pronouncements that require or permit assets or liabilities to be measured at
fair value.  This Statement is effective for financial statements
issued for fiscal years beginning after November 15, 2007 and interim periods
within those years.  The FASB has approved a one-year deferral for the
implementation of the Statement for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis.  The Corporation does not expect
the implementation of SFAS 157 to have a material impact on its consolidated
financial statements.





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS
158).  This Statement requires that employers measure plan assets and
obligations as of the balance sheet date.  This requirement is
effective for fiscal years ending after December 15, 2008.  The other
provisions of SFAS 158 were implemented by the Corporation as of March 31,
2007.  The Corporation does not expect the implementation of the
measurement date provisions of SFAS 158 to have a material impact on its
consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159).  This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective of
this Statement is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity’s first fiscal year that begins after November 15, 2007, with early
adoption available in certain circumstances.  The Corporation does not
expect the implementation of SFAS 159 to have a material impact on its
consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly
change the financial accounting and reporting of business combination
transactions.  SFAS 141(R) establishes principles for how an acquirer
recognizes and measures the identifiable assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain
purchase;







57


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)
 
  Recent Accounting
Pronouncements (continued)





and
determines what information to disclose to enable users of the financial
statements to evaluate the nature and financial effects of the business
combination.  SFAS 141(R) is effective for acquisition dates on or
after the beginning of an entity’s first year that begins after December 15,
2008.  The Corporation does not expect the implementation of SFAS
141(R) to have a material impact on its consolidated financial
statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
of ARB No. 51” (SFAS 160).  The Standard will significantly change the
financial accounting and reporting of noncontrolling (or minority) interests in
consolidated financial statements.  SFAS 160 is effective as of the
beginning of an entity’s first fiscal year that begins after December 15, 2008,
with early adoption prohibited.  The Corporation does not expect the
implementation of SFAS 160 to have a material impact on its consolidated
financial statements.





In March
2008, the FASB issued Statement of Financial Accounting Standards No. No. 161,
“Disclosures about Derivative Instruments and Hedging Activities – an amendment
of FASB Statement No. 133”(SFAS
161).  SFAS 161 changes the disclosure requirements for derivative
instruments and hedging activities.  Entities are required to provide
enhanced disclosures about how and why an entity uses derivative instruments,
how derivative instruments and related hedged items are accounted for under
Statement 133 and its related interpretations, and how derivative instruments
and related hedged items affect an entity’s financial position, financial
performance and cash flows.  SFAS 161 is effective for fiscal years
and interim periods beginning after November 15, 2008, with early application
permitted. The Corporation does not expect the implementation of SFAS 161 to
have a material impact on its consolidated financial statements.





In
September 2006, the Emerging Issues Task Force (EITF) issued EITF 06-4,
“Accounting for Deferred Compensation and Postretirement Benefit Aspects of
Endorsement Split-Dollar Life Insurance Arrangements.”  This consensus
concludes that for a split-dollar life insurance arrangement within the scope of
this Issue, an employer should recognize a liability for future benefits in
accordance with SFAS 106 (if, in substance, a postretirement benefit plan
exists) or APB Opinion No. 12 (if the arrangement is, in substance, an
individual deferred compensation contract) based on the substantive agreement
with the employee.  The consensus is effective for fiscal years
beginning after December 15, 2007, with early application
permitted.  The Corporation does not expect the implementation of EITF
06-4 to have a material impact on its consolidated financial
statements.





In
November 2006, the EITF issued “Accounting for Collateral Assignment
Split-Dollar Life Insurance Arrangements” (EITF 06-10).  In this
Issue, a consensus was reached that an employer should recognize a liability for
the postretirement benefit related to a collateral assignment split-dollar life
insurance arrangement in accordance with either SFAS 106 or APB Opinion No. 12,
as appropriate, if the employer has agreed to maintain a life insurance policy
during the employee's retirement or provide the employee with a death benefit
based on the substantive agreement with the employee.  A consensus
also was reached that an employer should recognize and measure an asset based on
the nature and substance of the collateral assignment split-dollar life
insurance arrangement.  The consensuses are effective for fiscal years
beginning after December 15, 2007, including






58


Community
Financial Corporation
 and
Subsidiary
 
 Summary
of Accounting Policies
 (continued)
 
  Recent Accounting
Pronouncements (continued)





interim
periods within those fiscal years, with early application
permitted.  The Corporation does not expect the implementation of EITF
06-10 to have a material impact on its consolidated financial
statements.





In
February 2007, the FASB issued FSP No. FAS 158-1, “Conforming Amendments to the
Illustrations in FASB Statements No. 87, No. 88 and No. 106 and to the Related
Staff Implementation Guides.” This FSP provides conforming amendments to the
illustrations in SFAS 87, 88, and 106 and to related staff implementation guides
as a result of the issuance of SFAS 158.  The conforming amendments
made by this FSP are effective as of the effective dates of SFAS
158.  The unaffected guidance that this FSP codifies into SFAS 87, 88,
and 106 does not contain new requirements and therefore does not require a
separate effective date or transition method.  The Corporation does
not expect the implementation of FSP No. FAS 158-1 to have a material impact on
its consolidated financial statements.





In
November 2007, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 109, “Written Loan Commitments Recorded at Fair Value
Through Earnings” (SAB 109). SAB 109 expresses the current view of the staff
that the expected net future cash flows related to the associated servicing of
the loan should be included in the measurement of all written loan commitments
that are accounted for at fair value through earnings. SEC registrants are
expected to apply the views in Question 1 of SAB 109 on a prospective basis to
derivative loan commitments issued or modified in fiscal quarters beginning
after December 15, 2007.  The Corporation does not expect the
implementation of SAB 109 to have a material impact on its consolidated
financial statements.





In
December 2007, the SEC issued Staff Accounting Bulletin No. 110, “Use of a
Simplified Method in Developing Expected Term of Share Options” (SAB
110).   SAB 110 expresses the current view of the staff that it
will accept a company’s election to use the simplified method discussed in SAB
107 for estimating the expected term of “plain vanilla” share options regardless
of whether the company has sufficient information to make more refined
estimates.  The staff noted that it understands that detailed
information about employee exercise patterns may not be widely available by
December 31, 2007.  Accordingly, the staff will continue to accept,
under certain circumstances, the use of the simplified method beyond December
31, 2007.  The Corporation does not expect the implementation of SAB
110 to have a material impact on its consolidated financial
statements.






59




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


1.  
      SecuritiesA
      summary of the amortized cost and estimated market values of securities is
      as follows:March
      31, 2008Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Market
              ValueAmortized
              CostHeld
      to MaturityUnited States government
      andagency
obligations
            
            $
            2,500,000
            
            
            $
            7,250
            
            
            $
            -
            
            
            $
            2,507,250State and municipal
      obligations
            
            
            440,217
            
            
            
            913
            
            
            
            51
            
            
            
            441,0792,940,217
            
            
            
            8,163
            
            
            
            51
            
            
            
            2,948,329Available
      for SaleEquity securities
            
            
            11,745,663
            
            
            
            1,236,958
            
            
            
            3,420,211
            
            
            
            9,562,410$
            14,685,880
            
            
            $
            1,245,121
            
            
            $
            3,420,262
            
            
            $
            12,510,739










60


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


1. 
      Securities
      (continued)March
      31, 2007Gross
              Unrealized
              Gains
            
            
            Gross
              Unrealized
              Losses
            
            
            Estimated
              Market
              ValueAmortized
              CostHeld
      to MaturityUnited States government
      andagency
obligations
            
            $
            22,581,344
            
            
            $
            -
            
            
            $
            342,744
            
            
            $
            22,238,600State and municipal
      obligations
            
            
            1,004,631
            
            
            
            290
            
            
            
            11,199
            
            
            
            993,72223,585,975
            
            
            
            290
            
            
            
            353,943
            
            
            
            23,232,322Available
      for SaleEquity securities
            
            
            11,774,515
            
            
            
            2,973,477
            
            
            
            497,897
            
            
            
            14,250,095$
            35,360,490
            
            
            $
            2,973,767
            
            
            $
            851,840
            
            
            $
            37,482,417











61


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


1.           Securities
(continued)





The
amortized cost and estimated market value of securities at March 31, 2008, by
contractual maturity, are as follows:





Estimated
              Market
              ValueAmortized
              CostHeld
      to MaturityDue in one year or
      less
            
            $
            740,170
            
            
            $
            743,133Due in one through five
      years
            
            
            2,200,047
            
            
            
            2,205,1962,940,217
            
            
            
            2,948,329Available
      for SaleEquity securities
            
            
            11,745,663
            
            
            
            9,562,410$
            14,685,880
            
            
            $
            12,510,739





Securities
having a market value of $1,002,750 and $980,000 at March 31, 2008 and 2007,
respectively, were pledged by the Corporation for purposes required by
law.






62






Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


1.        Securities
(continued)





Information
pertaining to securities with gross unrealized losses at March 31, 2008 and
2007, aggregated by investment category and length of time that individual
securities have been in a continuous loss position, follows:




March
      31, 2008Less Than Twelve
      Months
            
            
            Over
      Twelve MonthsGross
            
            
            Estimated
            
            
            Gross
            
            
            EstimatedUnrealized
            
            
            Market
            
            
            Unrealized
            
            
            MarketLosses
            
            
            Value
            
            
            Losses
            
            
            ValueHeld
      to MaturityUnited States government
      and
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -agency
obligationsState and municipal
      obligations
            
            
            -
            
            
            
            -
            
            
            
            51
            
            
            
            199,996Available
      for SaleEquity securities
            
            
            1,657,000
            
            
            
            4,475,500
            
            
            
            1,763,211
            
            
            
            3,800,125$
            1,657,000
            
            
            $
            4,475,500
            
            
            $
            1,763,262
            
            
            $
            4,000,121






March 31, 2007Less Than Twelve Months
            
            
            Over
      Twelve MonthsGross
            
            
            
            Estimated
            
            
            
            Gross
            
            
            
            EstimatedUnrealized
            
            
            
            Market
            
            
            
            Unrealized
            
            
            
            MarketLosses
            
            
            
            Value
            
            
            
            Losses
            
            
            
            ValueHeld
      to MaturityUnited States government
      andagency
obligations
            
            $
            30,094
            
            
            $
            2,051,250
            
            
            $
            312,650
            
            
            $
            20,187,350State and municipal
      obligations
            
            
            218
            
            
            
            562,750
            
            
            
            10,981
            
            
            
            389,86030,312
            
            
            
            2,614,000
            
            
            
            323,631
            
            
            
            20,577,210Available
      for SaleEquity securities
            
            
            -
            
            
            
            -
            
            
            
            497,897
            
            
            
            11,226,814$
            30,312
            
            
            $
            2,614,000
            
            
            $
            821,528
            
            
            $
            31,804,024






63




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 1.        Securities
(continued)
 At March
31, 2008, one debt security had an unrealized loss with depreciation of 0.03%
from the Corporation’s amortized cost basis.  The unrealized loss is
related to a tax free municipal.  In analyzing an issuer’s financial
condition, management considers whether the securities are issued by the federal
government or its agencies and whether downgrades by bond debt rating agencies
have occurred.  As management has the ability and intent to hold debt
securities until maturity, or for a period of time sufficient to allow for any
anticipated recovery in fair value, no declines are deemed to be other than
temporary.





At March
31, 2008, four marketable equity securities had unrealized losses with aggregate
depreciation of 29.24% from the Corporation’s cost basis.  The
securities have an investment grade rating of AA or better.  Two of
the securities with unrealized losses relate primarily to government agencies
and have existed for less than twenty-four months.  The movement in
the market value of the securities is closely related to changes in interest
rates.  In analyzing the issuer’s financial condition, management
considers whether the securities are issued by the federal government or its
agencies and whether downgrades by bond debt rating agencies have
occurred.  As management has the ability and intent to hold these
equity securities for the foreseeable future, no declines are deemed to be other
than temporary.





2.        Loans
Receivable, Net





Loans
receivable are summarized as follows:





March
      31,
            
            2008
            
            
            2007Residential
      real estate
            
            $
            122,604,826
            
            
            $
            118,044,383Commercial
      real estate
            
            
            150,059,098
            
            
            
            119,353,129Construction
            
            
            53,891,019
            
            
            
            48,857,156Commercial
      business
            
            
            41,577,858
            
            
            
            37,690,485Consumer
            
            
            84,671,436
            
            
            
            88,970,208452,804,237
            
            
            
            412,915,361Less:Loans in process
            
            
            13,599,373
            
            
            
            11,883,782Deferred loan (costs),
      net
            
            
            (1,183,704
            )
            
            
            (1,299,212
            )Allowance for loan
      losses
            
            
            3,214,771
            
            
            
            3,078,39715,630,440
            
            
            
            13,662,967$
            437,173,797
            
            
            $
            399,252,394





Loans
serviced for others amounted to approximately $390,094 and $609,599 at March 31,
2008 and 2007, respectively.  The loans are not included in the
accompanying consolidated balance sheets.






64




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
 2.         Loans
Receivable, Net (continued)





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





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Balance
      at beginning of year
            
            $
            3,078,397
            
            
            $
            2,966,077
            
            
            $
            3,021,493Provision
      for loan loss
            
            
            624,717
            
            
            
            388,074
            
            
            
            176,942Loans
      charged-off
            
            
            (623,055
            )
            
            
            (356,659
            )
            
            
            (347,353
            )Recoveries
      of loans previously charged-off
            
            
            134,712
            
            
            
            80,905
            
            
            
            114,995Balance
      at end of year
            
            $
            3,214,771
            
            
            $
            3,078,397
            
            
            $
            2,966,077





Impaired
loans without a valuation allowance totaled $47,768, $1,098,438 and $38,368 as
of March 31, 2008, 2007 and 2006, respectively.  The average
investment in impaired loans for the years ended March 31, 2008, 2007 and 2006
totaled $871,220, $875,698, and $22,722, respectively.  No interest
income was recognized on these loans.





No
additional funds are committed to be advanced in connection with impaired
loans.  There were no loans past due 90 days and still accruing
interest.





Nonaccrual
loans excluded from impaired loan disclosure amounted to $1,026,298, $322,780
and $460,156 at March 31, 2008, 2007 and 2006, respectively.  If
interest on these loans had been accrued, such income would have approximated
$44,880, $19,156 and $19,059 for the years ended March 31, 2008, 2007 and 2006,
respectively.





3.           Property
and Equipment





Property
and equipment are summarized as follows:





March
      31,
            
            2008
            
            
            2007Buildings
            
            $
            7,495,040
            
            
            $
            7,303,385Land
      and improvements
            
            
            2,636,832
            
            
            
            2,553,843Furniture
      and equipment
            
            
            5,061,235
            
            
            
            4,864,274Construction
      in progress
            
            
            43,613
            
            
            
            --15,236,720
            
            
            
            14,721,502Less
      accumulated depreciation and amortization
            
            
            7,313,239
            
            
            
            6,700,231Property
      and equipment, net
            
            $
            7,923,481
            
            
            $
            8,021,271





Depreciation
expense for the years ended March 31, 2008, 2007 and 2006 amounted to $613,008,
$594,548 and $563,732, respectively.






65




Community
Financial Corporation


and
Subsidiary





Notes
to Consolidated Financial Statements


(continued)







4.        Deposits





Deposits
are summarized as follows:





March
      31,
            
            2008
            
            
            2007Demand
      depositsNoninterest
bearing
            
            $
            28,319,635
            
            
            $
            31,370,625Savings accounts
            
            
            27,520,369
            
            
            
            27,584,252NOW accounts
            
            
            26,713,601
            
            
            
            26,737,235Money market deposit
      accounts
            
            
            22,363,900
            
            
            
            20,122,373Total
      demand deposits
            
            
            104,917,505
            
            
            
            105,814,485Time
      deposits
            
            
            245,813,329
            
            
            
            224,723,219$
            350,730,834
            
            
            $
            330,537,704





The
aggregate amount of time deposit accounts with a minimum denomination of
$100,000 was $72,389,880 and $62,367,103 at March 31, 2008 and 2007,
respectively.





Time
deposits mature as follows:





Year
      Ending March 31,2009
            
            $206,957,3332010
            
            25,119,7712011
            
            7,882,1702012
            
            2,817,6682013
            
            3,036,387$245,813,329





At March
31, 2008 and 2007, overdraft demand deposits reclassified to loans totaled
$77,926 and $72,080, respectively.






66




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
  4.        Deposits
(continued)





Interest
expense on deposits is summarized as follows:





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Time
      deposits
            
            $
            11,300,885
            
            
            $
            9,227,349
            
            
            $
            6,187,760Money
      market deposit and NOW accounts
            
            
            686,406
            
            
            
            594,225
            
            
            
            438,572Savings
            
            
            366,990
            
            
            
            225,849
            
            
            
            262,221$
            12,354,281
            
            
            $
            10,047,423
            
            
            $
            6,888,553





5.        Fair
Value of Financial Instruments





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





March 31,
            
            2008
            
            
            2007Carrying
            
            
            Fair
            
            
            Carrying
            
            
            Fair(In
      Thousands)
            
            Amount
            
            
            Value
            
            
            Amount
            
            
            ValueFinancial
      assetsCash and cash
      equivalents
            
            $
            15,998
            
            
            $
            15,998
            
            
            $
            3,626
            
            
            $
            3,626Securities
            
            
            12,503
            
            
            
            12,511
            
            
            
            35,836
            
            
            
            37,482Federal Home Loan Bank stock,
      restricted
            
            
            5,211
            
            
            
            5,211
            
            
            
            4,822
            
            
            
            4,822Loans, net
            
            
            437,174
            
            
            
            449,159
            
            
            
            399,252
            
            
            
            400,290Accrued interest
      receivable
            
            
            2,079
            
            
            
            2,079
            
            
            
            2,232
            
            
            
            2,232Financial
      liabilitiesDeposits
            
            $
            350,731
            
            
            $
            355,167
            
            
            $
            330,538
            
            
            $
            330,241Advances from Federal Home Loan
      Bank
            
            
            96,000
            
            
            
            96,325
            
            
            
            89,000
            
            
            
            88,786Securities sold under agreements
      to repurchase
            
            
            2,834
            
            
            
            2,834
            
            
            
            1,740
            
            
            
            1,740Accrued interest
      payable
            
            
            910
            
            
            
            910
            
            
            
            1,341
            
            
            
            1,341









67


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


5.        Fair
Value of Financial Instruments (continued)





The fair
value of a financial instrument is the current amount that would be exchanged
between willing parties, other than in a forced liquidation.  Fair
value is best determined based upon quoted market prices.  However, in
many instances, there are no quoted market prices for the Corporation’s various
financial instruments.  In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques.  Those techniques are significantly affected by
the assumptions used, including the discount rate and estimates of future cash
flows.  Accordingly, the fair value estimates may not be realized in
an immediate settlement of the instrument.  SFAS No. 107 excludes
certain financial instruments and all non-financial instruments from its
disclosure requirements.  Accordingly, the aggregate fair value
amounts presented may not necessarily represent the underlying fair value of the
Corporation.





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





Cash and cash
equivalents





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





Securities





Fair
values for securities, excluding Federal Home Loan Bank stock, are based on
quoted market prices or dealer quotes.  If a quoted market price is
not available, fair value is estimated using quoted market prices for similar
securities.  The carrying value of Federal Home Loan Bank stock
approximates fair value based on the redemption provisions of the Federal Home
Loan Bank.





Loans
receivable





For
variable-rate loans that reprice frequently and with no significant change in
credit risk, fair values are based on carrying values.  Fair values
for certain mortgage loans (e.g., one-to-four family residential), credit card
loans, and other consumer loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions, adjusted for
differences in loan characteristics.  Fair values for other loans
(e.g., commercial real estate and investment property mortgage loans, commercial
and industrial loans) are estimated using discounted cash flow analyses, using
interest rates currently being offered for loans with similar terms to borrowers
of similar credit quality.  Fair values for non-performing loans are
estimated using discounted cash flow analyses or underlying collateral values,
where applicable.





68


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 5.        Fair
Value of Financial Instruments (continued)
 Deposit
liabilities





The fair
values disclosed for demand deposits (e.g., interest and non-interest checking,
passbook savings, and certain types of money market accounts) are, by
definition, equal to the amount payable on demand at the reporting date (i.e.,
their carrying amounts).  The carrying amounts of variable-rate,
fixed-term money market accounts and certificates of deposit approximate their
fair values at the reporting date.  Fair values for fixed-rate
certificates of deposit are estimated using a discounted cash flow calculation
that applies interest rates currently being offered on certificates to a
schedule of aggregated expected monthly maturities on time
deposits.





Advances from Federal Home
Loan Bank





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





Securities sold under
agreements to repurchase





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





Accrued
interest





The
carrying amounts of accrued interest approximate fair value.





Off-balance sheet
instruments





The fair
value of commitments to extend credit is estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present credit worthiness of the
counterparties.  For fixed-rate loan commitments, fair value also
considers the difference between current levels of interest rates and the
committed rates.  The fair value of standby letters of credit is based
on fees currently charged for similar agreements or on the estimated cost to
terminate them or otherwise settle the obligations with the counterparties at
the reporting date.  At March 31, 2008 and 2007, the fair value of
loan commitments and standby letters of credit were deemed
immaterial.






69




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


6.        Advances
from Federal Home Loan Bank





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





Due in year
      ending March 31,2009
            
            $
            76,000,0002011
            
            
            20,000,000$
            96,000,000





The
weighted average interest rate on advances was 2.80% and 5.22% at March 31, 2008
and 2007, respectively.  These advances are collateralized by the
investment in FHLB stock and the Corporation’s portfolio of first mortgage
loans, multi-family, commercial real estate, second mortgage and home equity
lines of credit under a Blanket Floating Lien Agreement.  Value of
this collateral as of March 31, 2008 was $145,083,177.





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





Year
      Ended March 31,
            2008
            2007
            2006Maximum
      amount outstanding during the year
            $105,000,000
            $  96,000,000
            $  82,000,000Average
      amount outstanding during the year
            $96,049,162
            $  90,002,740
            $  72,167,123Average
      interest rate during the year
            4.75%
            5.22%
            3.94%






70


Community
Financial Corporation


and
Subsidiary





Notes
to Consolidated Financial Statements


(continued)







7.           Securities
Sold Under Agreements to Repurchase





Securities
sold under agreements to repurchase are secured borrowings that generally mature
within one to four days from the transaction date.  These amounts are
recorded at the amount of cash received in connection with the
transaction.  The Corporation may be required to provide additional
collateral based on the fair value of the underlying securities.





The
following is a summary of certain information regarding the Corporation’s
repurchase agreements:





Year
      Ended March 31,
            2008
            2007
            2006Balance
      at end of year
            $2,834,412
            $   1,739,690
            $      976,427Weighted
      average interest rate during the year
            2.54%
            3.18%
            3.82%Average
      amount outstanding during the year
            $2,586,392
            $   1,540,939
            $  15,149,098Maximum
      amount outstanding at any month endduring the year
            $3,921,662
            $   2,361,835
            $  17,589,331







71


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
  8.        Income
Taxes





The
Corporation files income tax returns in the U.S. federal jurisdiction and the
state of Virginia.  With few exceptions, the Corporation is no longer
subject to U.S. federal, state and local income tax examinations by tax
authorities for years prior to 2004.





The
Corporation adopted the provisions of FIN 48, “Accounting for Uncertainty in
Income Taxes,” on April 1, 2007 with no impact on the financial
statements.





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





March
      31,
            
            2008
            
            
            2007Deferred
      tax assetsAllowance for
    losses
            
            $
            1,221,613
            
            
            $
            1,169,791Deferred
    compensation
            
            
            480,789
            
            
            
            339,793Unrealized
      loss on securities available for sale
            
            
            829,637
            
            
            
            -Pension
            
            
            -
            
            
            
            150,620Other
            
            
            248,726
            
            
            
            50,1462,780,765
            
            
            
            1,710,350Deferred
      tax liabilitiesDepreciable assets
            
            
            (211,013
            )
            
            
            (229,318
            )Unrealized gain on securities
      available for sale
            
            
            -
            
            
            
            (940,720
            )Pension
            
            
            (111,598
            )
            
            
            -(322,611
            )
            
            
            1,170,038Net
      deferred tax asset
            
            $
            2,458,154
            
            
            $
            540,312





The
provision for income taxes charged to operations for the years ended March 31,
2008, 2007 and 2006, consists of the following:





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Current
            
            $
            2,010,955
            
            
            $
            2,211,177
            
            
            $
            1,986,528Deferred
            
            
            (155,330
            )
            
            
            (184,604
            )
            
            
            (66,960
            )$
            1,855,625
            
            
            $
            2,026,573
            
            
            $
            1,919,568








72




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
  8.        Income
Taxes (continued)





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





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Tax
      at statutory rate
            
            
            34.0
            %
            
            
            34.0
            %
            
            
            34.0
            %Increases
      (decreases) in taxes resulting from:State income taxes, net of federal
      benefit
            
            
            3.0
            
            
            
            2.9
            
            
            
            1.9Non-taxable interest and dividend
      received deduction
            
            
            (2.8
            )
            
            
            (2.8
            )
            
            
            (2.7
            )Bank-owned
      life insurance
            
            
            (1.5
            )
            
            
            (1.1
            )
            
            
            (1.4
            )Other
            
            
            (0.1
            )
            
            
            0.1
            
            
            
            (0.8
            )32.6
            %
            
            
            33.1
            %
            
            
            31.0
            %





9.        Comprehensive
Income





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





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Unrealized
      gains (losses) on securities:Unrealized holding gain (loss)
      arising during the period
            
            $
            (4,658,833
            )
            
            $
            715,145
            
            
            $
            46,470Pension
      liability adjustment
            
            
            14,788
            
            
            
            -
            
            
            
            -Income
      tax (expense) benefit related to items of othercomprehensive
    income
            
            
            1,768,367
            
            
            
            (271,755
            )
            
            
            (17,659
            )Other
      comprehensive income (loss), net of tax
            
            $
            (2,875,678
            )
            
            $
            443,390
            
            
            $
            28,811





The
components of accumulated other comprehensive income, included in stockholders'
equity, are as follows:





March
      31,
            2008
            2007Net
      unrealized gain (loss) on securities available for sale
            $
            (2,183,253
            )
            
            $
            2,475,580Tax
      effect
            
            829,637
            
            
            
            (940,719
            )Net-of-tax
      amount
            
            (1,353,616
            )
            
            
            1,534,861Pension
      liability adjustment
            
            (595,580
            )
            
            
            (610,368
            )Tax
      effect
            
            (226,320
            )
            
            
            228,309Net-of-tax
      amount
            
            (369,260
            )
            
            
            (382,059
            )$
            (1,722,876
            )
            
            $
            1,152,802





73


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
  10.           Stockholders’
Equity and Regulatory Capital Requirements





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





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





Amount
            
            
            Percent
            
            
            Actual
            
            
            Actual
            
            
            ExcessMarch 31,
      2008
            
            Required
            
            
            Required
            
            
            Amount
            
            
            Percent
            
            
            Amount(In
      Thousands)Tangible
      Capital
            
            $
            7,466
            
            
            
            1.50
            %
            
            $
            38,872
            
            
            
            7.81
            %
            
            $
            31,406Core
      Capital
            
            
            19,910
            
            
            
            4.00
            
            
            
            38,872
            
            
            
            7.81
            
            
            
            18,962Risk-based
      Capital
            
            
            33,699
            
            
            
            8.00
            
            
            
            42,042
            
            
            
            9.98
            
            
            
            8,343Amount
            
            
            Percent
            
            
            Actual
            
            
            Actual
            
            
            ExcessMarch
      31, 2007
            
            Required
            
            
            Required
            
            
            Amount
            
            
            Percent
            
            
            AmountTangible
      Capital
            
            $
            6,955
            
            
            
            1.50
            %
            
            $
            35,932
            
            
            
            7.75
            %
            
            $
            28,977Core
      Capital
            
            
            18,545
            
            
            
            4.00
            
            
            
            35,932
            
            
            
            7.75
            
            
            
            17,387Risk-based
      Capital
            
            
            30,418
            
            
            
            8.00
            
            
            
            40,064
            
            
            
            10.54
            
            
            
            9,646





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





Capital
distributions by OTS-regulated savings banks are limited by regulation ("Capital
Distribution Regulation").  Capital distributions are defined to
include, in part, dividends, stock repurchases and cash-out
mergers.  The Capital Distribution Regulation permits a "Tier 1"
savings bank to make capital distributions during a calendar year equal to net
income for the current year plus the previous two years net income, less capital
distributions paid over that same time period.  Any distributions in
excess of that amount require prior OTS notice, with the opportunity for OTS to
object to the distribution.  A Tier 1 savings bank is defined as a
savings bank that has, on a pro forma basis after the proposed distribution,
capital equal to or greater than the OTS fully phased-in capital requirement and
has not been deemed by the OTS to be "in need of more than normal
supervision".  The Bank is currently classified as a Tier 1
institution for these purposes.  The Capital Distribution Regulation
requires that savings banks provide the applicable OTS District Director with a
30-day advance written notice of all proposed capital distributions whether or
not advance approval is required by the regulation.





74


Community
Financial Corporation


and
Subsidiary





Notes
to Consolidated Financial Statements


(continued)







11.           Earnings
Per Share





During
the year ended March 31, 2003, the Board of Directors authorized a stock
repurchase program under which 368,706 shares of the Corporation’s stock may be
repurchased.  8,074 shares were repurchased during the fiscal year
ended March 31, 2008.  No shares were repurchased during the fiscal
years ended March 31, 2007 and 2006.  All information for the periods
presented has been retroactively restated to reflect the stock split declared on
July 26, 2006.





Earnings
per share is calculated as follows:





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Basic
      earnings per shareIncome
      available to common shareholders
            
            $
            3,835,822
            
            
            $
            4,091,208
            
            
            $
            4,267,732Weighted
      average shares outstanding
            
            
            4,305,445
            
            
            
            4,258,737
            
            
            
            4,198,210Basic
      earnings per share
            
            $
            0.89
            
            
            $
            0.96
            
            
            $
            1.02Diluted
      earnings per shareIncome
      available to common shareholders
            
            $
            3,835,822
            
            
            $
            4,091,208
            
            
            $
            4,267,732Weighted
      average shares outstanding
            
            
            4,305,445
            
            
            
            4,258,737
            
            
            
            4,198,210Dilutive effect of stock
      options
            
            
            93,576
            
            
            
            157,433
            
            
            
            162,640Total
      weighted average shares outstanding
            
            
            4,399,021
            
            
            
            4,416,170
            
            
            
            4,360,850Diluted
      earnings per share
            
            $
            0.87
            
            
            $
            0.93
            
            
            $
            0.98





During
the years ended March 31, 2008 and 2006, stock options representing 142,000
shares and 95,900 shares, respectively, on average were not included in the
calculation of earnings per share because their effect would have been
antidilutive. No stock options were excluded for the year ended March 31, 2007.
For the years presented, there was no adjustment to income for potential common
shares.






75




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
  12.           Employee
Benefit Plans





Pension
Plan





The
Corporation has a noncontributory defined benefit pension plan covering
substantially all of its employees.  The benefits are based on years
of service and final average compensation.  The Corporation's funding
policy is to contribute amounts to the pension trust at least equal to the
minimum funding requirements of the Employee Retirement Income Security Act of
1974 (ERISA), but not in excess of the maximum tax deductible
amount.  Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the
future.  The measurement date for the pension plan was December 31,
2007, 2006 and 2005.  Prepaid pension cost includes any contributions
made after the measurement date but prior to the fiscal year end.  The
following is a summary of information with respect to the plan:





March
      31,
            
            2008
            
            
            2007
            
            
            2006Change
      in benefit obligation:Benefit
      obligation at beginning of year
            
            $
            2,956,892
            
            
            $
            2,525,278
            
            
            $
            2,196,256Service
      cost
            
            
            345,315
            
            
            
            300,774
            
            
            
            287,727Interest
      cost
            
            
            182,931
            
            
            
            149,327
            
            
            
            132,037Actuarial
      (gain) loss
            
            
            (32,329
            )
            
            
            9,631
            
            
            
            (59,837
            )Benefits
      paid
            
            
            (29,919
            )
            
            
            (28,118
            )
            
            
            (30,905
            )Benefit
      obligation at end of year
            
            
            3,422,890
            
            
            
            2,956,892
            
            
            
            2,525,278Change
      in plan assets:Fair
      value of plan assets at beginning of year
            
            
            2,530,479
            
            
            
            2,067,665
            
            
            
            1,665,881Actual
      return on plan assets
            
            
            130,956
            
            
            
            100,574
            
            
            
            82,004Employer
      contribution
            
            
            1,065,840
            
            
            
            390,358
            
            
            
            350,685Benefits
      paid
            
            
            (29,919
            )
            
            
            (28,118
            )
            
            
            (30,905
            )Fair
      value of plan assets at end of year
            
            
            3,697,356
            
            
            
            2,530,479
            
            
            
            2,067,665Funded
      status
            
            
            274,466
            
            
            
            (426,413
            )
            
            
            (457,613
            )Unrecognized
      net actuarial loss
            
            
            -
            
            
            
            -
            
            
            
            585,842(Accrued)
      prepaid pension cost
            
            
            274,466
            
            
            $
            (426,413
            )
            
            $
            128,229





Amounts
      recognized in the balance sheet:
              Other
      assets
            
            $
            274,466
            
            
            $
            -
            
            
            $
            128,229Other
      liabilities
            
            
            -
            
            
            
            426,413
            
            
            
            -





Amounts
      recognized in accumulated other
              comprehensive
      income (loss):Net
      loss
            
            $
            (595,580
            )
            
            $
            610,368
            
            
            $
            -









76




Community
Financial Corporation


and
Subsidiary





Notes
to Consolidated Financial Statements


(continued)







12.           Employee
Benefit Plans (continued)





The
accumulated benefit obligation for the defined benefit pension plan was
$2,358,379, $2,013,062 and $1,684,750 as of March 31, 2008, 2007 and 2006,
respectively.





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Components
      of net periodic pension cost:Service
      cost
            
            $
            345,315
            
            
            $
            300,774
            
            
            $
            287,727Interest
      cost
            
            
            182,931
            
            
            
            149,327
            
            
            
            132,037Expected
      return on plan assets
            
            
            (175,740
            )
            
            
            (143,504
            )
            
            
            (124,077
            )Recognized
      net actuarial loss
            
            
            27,243
            
            
            
            28,035
            
            
            
            34,386Net
      periodic benefit cost
            
            
            379,749
            
            
            
            334,632
            
            
            
            330,073Other
      changes in plan assets and benefit obligationsrecognized
      in accumulated other comprehensive
              income:Net
      loss (gain)
            
            
            (14,788
            )
            
            
            610,368
            
            
            
            -Deferred
      income tax expense (benefit)
            
            
            1,990
            
            
            
            (228,309
            )
            
            
            -Total
      recognized in other comprehensive income
            
            
            (12,798
            )
            
            
            382,059
            
            
            
            -Total
      recognized in net periodic benefit cost andAccumulated
      other comprehensive income
            
            $
            366,951
            
            
            $
            716,691
            
            
            $
            330,073


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





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Weighted
      average discount rate
            
            
            6.25
            %
            
            
            6.00
            %
            
            
            5.75
            %Increase
      in future compensation levels
            
            
            4.00
            %
            
            
            4.00
            %
            
            
            4.00
            %








77




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
  12.          Employee
Benefit Plans (continued)





The
following assumed rates were used in determining the net periodic pension
costs:





Year
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Weighted
      average discount rate
            
            
            6.00
            %
            
            
            5.75
            %
            
            
            6.00
            %Expected
      long-term rate of return on plan assets
            
            
            7.00
            %
            
            
            7.00
            %
            
            
            7.50
            %Increase
      in future compensation levels
            
            
            4.00
            %
            
            
            4.00
            %
            
            
            5.00
            %





Long-Term
Rate of Return





The plan sponsor selects the expected
long-term rate of return on assets assumption in consultation with their
investment advisors.  The rate is intended to reflect the average rate
of earnings expected to be earned on the funds invested to provide plan
benefits.  Historical performance is reviewed with respect to real
rates of return (net of inflation) for the major asset classes held or
anticipated to be held by the trust, and for the trust itself.  Undue
weight is not given to recent experience that may not continue over the
measurement period, with higher significance placed on current forecasts of
future long-term economic conditions.






78




Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
  12.          Employee
Benefit Plans (continued)





The
pension plan’s weighted-average asset allocations at December 31, 2007 and 2006,
by asset category are as follows:





December
      31,
            2007
            
            2006Fixed
      income securities
            77%
            
            66%Equity
      securities
            11%
            
            9%Cash
            3%
            
            25%Other
            9%
            
            −100%
            
            100%




Funds are
invested in a participation guarantee contract of the selected insurance
company.  The funds are in the general assets of the guaranteeing
company which are primarily long-term bonds and long-term
mortgages.  Funds are guaranteed by the insurance company against
failed investments.  Interest is credited annually to the
funds.





The
Corporation expects to contribute $492,000 to its pension plan during the year
ending March 31, 2009.





Estimated
future benefit payments, which reflect expected future service, as appropriate,
are as follows:





Year
      Ending March 31,2009
            
            $
            55,8252010
            
            
            108,0672011
            
            
            117,1282012
            
            
            137,1252013
            
            
            160,4382014-2017
            
            
            1,338,284








79


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 
 12.          Employee
Benefit Plans (continued)





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





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





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





Profit-sharing
expenses were approximately $181,000, $168,000 and $156,000 for the years ended
March 31, 2008, 2007 and 2006, respectively.





Deferred
Compensation Plans





During
the year ended March 31, 2004, the Corporation adopted deferred compensation
plans for the Board of Directors, President and four Executive
Officers.  Benefits are to be paid in monthly installments commencing
at retirement and ending upon the death of the director or
officer.  The agreement provides that if board membership or
employment is terminated for reasons other than death or disability prior to
retirement age, the amount of benefits would be reduced.  The deferred
compensation expense for the years ended March 31, 2008, 2007 and 2006, based on
the present value of the retirement benefits, was $371,000, $357,000 and
$267,000, respectively.  The deferred compensation liability was
$1,265,000 and $894,000 at March 31, 2008 and 2007, respectively.  The
plans are unfunded; however, life insurance has been acquired on the life of the
employees in amounts sufficient to discharge the obligation.






80


Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)





The
Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to employees.  All options are
exercisable at end of year.  All information has been retroactively
restated to reflect the stock split declared on July 26, 2006.





The
following table summarizes options outstanding:




Year Ended March 31,
      2008Shares
            
            
            Weighted
      -
              Average
              Exercise
              Price
            
            
            Aggregate
              Intrinsic
              ValueOutstanding
      at
              beginning of year
            
            
            478,500
            
            
            $
            8.21Granted
            
            
            -
            
            
            
            -Forfeited
            
            
            (1,200
            )
            
            
            5.06Exercised
            
            
            (48,300
            )
            
            
            7.77Outstanding
      at
              end of year
            
            
            429,000
            
            
            $
            8.28
            
            
            
            -Exercisable at
      end
              of year
            
            
            429,000
            
            
            $
            8.28
            
            
            
            -




The
aggregate intrinsic value of a stock option in the table above represents the
total pre-tax intrinsic value (the amount by which the current market value of
the underlying stock exceeds the exercise price of the option) that would have
been received by option holders had all option holders exercised their options
on March 31, 2008.  This amount changes based on changes in the market
value of the Corporation's stock.





The total
intrinsic value of options exercised during the year ended March 31, 2008 was
$72,000.





No
options were granted during the years ended March 31, 2008 and
2007.






81
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)
 13.           Stock
Option Plan (continued)





The
following table summarizes information about stock options outstanding and
exercisable at March 31, 2008:





Options
      Outstanding and ExercisableWeightedAverage
            WeightedRemaining
            AverageContractual
            ExerciseRange
      of Exercise Price
            Number
            Life
      (in Years)
            Price$
      4.82 - $ 7.19
              $
      7.50 - $ 9.40
            160,800
              154,200
            1.66
              1.61
            $  5.50
              9.05$10.90-$11.22
            114,000
            7.13
            11.16





The
following table illustrates the effect on net income and earnings per share if
the Corporation had applied the fair value recognition provisions of SFAS 123,
"Accounting for Stock-Based Compensation," to stock-based employee compensation
for the year ended March 31, 2006.  In determining the pro forma
amounts below, the value of each grant is estimated at the grant date using the
Black-Scholes option-pricing model, with the following weighted-average
assumptions for grants in 2006; dividend rate of 2.46%, risk-free interest rate
of 5.00%; expected lives of 10 years; and expected price volatility of
19.25%.  The expected volatility is based on historical
volatility.  The risk-free interest rates for periods within the
contractual life of the awards are based on the U.S. Treasury rate effect at the
time of the grant.  The expected life is based on historical exercise
experience.  The dividend yield assumption is based on the
Corporation's history and expectation of dividend payouts.  There were
no option grants during the years ended March 31, 2008 and 2007.





Year
      Ended March 31,
            
            2006Net
      income, as reported
            
            $
            4,267,732Additional
      expense had the CorporationAdopted
      SFAS No. 123
            
            
            57,954Pro
      forma net income
            
            $
            4,209,778





Earnings
      per share:Basic
      - as reported
            
            $
            1.02Basic
      - pro forma
            
            
            1.01Diluted
      - as reported
            
            
            0.98Diluted
      - pro forma
            
            
            0.97






82
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


14.           Commitments
and Contingencies





The
Corporation is a party to credit related financial instruments with
off-balance-sheet risk in the normal course of business to meet the financing
needs of its customers.  These financial instruments include
commitments to extend credit, standby letters of credit and commercial letters
of credit.  Such commitments involve, to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets.





The
Corporation’s exposure to credit loss is represented by the contractual amount
of these commitments.  The Corporation follows the same credit
policies in making commitments as it does for on-balance-sheet
instruments.





At March
31, 2008 and 2007, the following financial instruments were outstanding whose
contract amounts represent credit risk:





Contract AmountMarch
      31,
            
            2008
            
            
            2007(In
      Thousands)Commitments
      to grant loans
            
            $
            22,028
            
            
            $
            14,972Unfunded
      commitments under lines of credit
            
            
            43,281
            
            
            
            38,109Standby
      letters of credit
            
            
            2,497
            
            
            
            1,944





83
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


14.           Commitments
and Contingencies (continued)





Commitments
to extend credit are agreements to lend to a customer as long as there is no
violation of any condition established in the contract.  Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee.  The commitments for equity lines of credit
may expire without being drawn upon.  Therefore, the total commitment
amounts do not necessarily represent future cash requirements.  The
amount of collateral obtained, if it is deemed necessary by the Corporation, is
based on management’s credit evaluation of the customer.





Unfunded
commitments under commercial lines of credit, revolving credit lines and
overdraft protection agreements are commitments for possible future extensions
of credit to existing customers.  These lines of credit are
uncollateralized and usually do not contain a specified maturity date and may
not be drawn upon to the total extent to which the Corporation is
committed.





Standby
letters of credit are conditional commitments issued by the Corporation to
guarantee the performance of a customer to a third party.  Those
letters of credit are primarily issued to support public and private borrowing
arrangements.  Essentially all letters of credit issued have
expiration dates within one year.  The credit risk involved in issuing
letters of credit is essentially the same as that involved in extending loan
facilities to customers.  The Corporation generally holds collateral
supporting those commitments if deemed necessary.





Leases





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





Year Ending March
      31,
            
            Amount2009
            
            $
            185,2612010
            
            
            191,0332011
            
            
            195,8482012
            
            
            183,0492013
            
            
            151,144Thereafter
            
            
            313,341$
            1,219,676





Total
lease expense was approximately $182,000, $186,000 and $153,000 for the years
ended March 31, 2008, 2007 and 2006, respectively.





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




84
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


14.           Commitments
and Contingencies (continued)





The
Corporation maintains its cash accounts in several correspondent
banks.  As of March 31, 2008, deposits in excess of amounts insured by
the Federal Deposit Insurance Corporation (FDIC) were approximately
$12,516,000.





15.           Related
Party Transactions





The
Corporation has had, and may be expected to have in the future, banking
transactions in the ordinary course of business with directors, principal
shareholders, executive officers, their immediate families and affiliated
companies in which they are principal shareholders (commonly referred to as
related parties), on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with
others.  At March 31, 2008 and 2007, these loans totaled $915,665 and
$451,338, respectively.  During the year ended March 31, 2008,
total principal additions were $596,525 and total principal payments were
$132,198.





Deposits
from related parties held by the Corporation at March 31, 2008 amounted to
$509,869.





16.           Selected
Quarterly Financial Data (Unaudited)





Condensed
quarterly consolidated financial data is shown as follows:





(Dollars
      in thousands except per share data)Year
      Ended March 31, 2008
            
            First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              QuarterTotal
      interest income
            
            $
            8,058
            
            
            $
            8,185
            
            
            $
            8,087
            
            
            $
            7,914Total
      interest expense
            
            
            4,238
            
            
            
            4,356
            
            
            
            4,432
            
            
            
            3,952Net
      interest income
            
            
            3,820
            
            
            
            3,829
            
            
            
            3,655
            
            
            
            3,962Provision
      for loan losses
            
            
            135
            
            
            
            217
            
            
            
            103
            
            
            
            170Net
      interest income after provisionfor
      loan losses
            
            
            3,685
            
            
            
            3,612
            
            
            
            3,552
            
            
            
            3,792Other
      income
            
            
            829
            
            
            
            857
            
            
            
            917
            
            
            
            740Other
      expenses
            
            
            2,980
            
            
            
            3,179
            
            
            
            3,108
            
            
            
            3,025Income
      before income taxes
            
            
            1,534
            
            
            
            1,290
            
            
            
            1,361
            
            
            
            1,507Income
      tax expense
            
            
            505
            
            
            
            413
            
            
            
            437
            
            
            
            501Net
      income
            
            $
            1,029
            
            
            $
            877
            
            
            $
            924
            
            
            $
            1,006Earnings
      per shareBasic
            
            $
            0.24
            
            
            $
            0.20
            
            
            $
            0.21
            
            
            $
            0.24Diluted
            
            $
            0.23
            
            
            $
            0.20
            
            
            $
            0.21
            
            
            $
            0.23




85
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


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





Year
      Ended March 31, 2007
            
            First
              Quarter
            
            
            Second
              Quarter
            
            
            Third
              Quarter
            
            
            Fourth
              QuarterTotal
      interest income
            
            $
            6,910
            
            
            $
            7,299
            
            
            $
            7,492
            
            
            $
            7,719Total
      interest expense
            
            
            3,273
            
            
            
            3,635
            
            
            
            3,876
            
            
            
            4,008Net
      interest income
            
            
            3,637
            
            
            
            3,664
            
            
            
            3,616
            
            
            
            3,711Provision
      for loan losses
            
            
            41
            
            
            
            81
            
            
            
            101
            
            
            
            165Net
      interest income after provisionfor
      loan losses
            
            
            3,596
            
            
            
            3,583
            
            
            
            3,515
            
            
            
            3,546Other
      income
            
            
            732
            
            
            
            856
            
            
            
            840
            
            
            
            758Other
      expenses
            
            
            2,807
            
            
            
            2,817
            
            
            
            2,799
            
            
            
            2,884Income
      before income taxes
            
            
            1,521
            
            
            
            1,622
            
            
            
            1,556
            
            
            
            1,420Income
      tax expense
            
            
            498
            
            
            
            539
            
            
            
            514
            
            
            
            476Net
      income
            
            $
            1,023
            
            
            $
            1,083
            
            
            $
            1,042
            
            
            $
            944Earnings
      per shareBasic
            
            $
            0.24
            
            
            $
            0.26
            
            
            $
            0.24
            
            
            $
            0.22Diluted
            
            $
            0.23
            
            
            $
            0.25
            
            
            $
            0.24
            
            
            $
            0.21








86
  Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


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





Condensed
      Balance SheetsMarch
      31,
            
            2008
            
            
            2007AssetsInvestment
      in subsidiary
            
            $
            37,149,004
            
            
            $
            37,085,068Cash
            
            
            765,640
            
            
            
            667,352Prepaid
      expenses and other assets
            
            
            790,059
            
            
            
            817,998Total
      assets
            
            $
            38,704,703
            
            
            $
            38,570,418Liabilities and Stockholders’
      EquityLiabilities, other
      liabilities
            
            $
            -
            
            
            $
            6Stockholders’
      EquityPreferred stock
            
            
            -
            
            
            
            -Common stock
            
            
            43,360
            
            
            
            42,957Additional paid-in
      capital
            
            
            5,391,704
            
            
            
            5,097,321Retained earnings
            
            
            34,992,515
            
            
            
            32,277,332Accumulated other comprehensive
      income (loss), net
            
            
            (1,722,876
            )
            
            
            1,152,802Total
      stockholders’ equity
            
            
            38,704,703
            
            
            
            38,570,412Total
      liabilities and stockholders’ equity
            
            $
            38,704,703
            
            
            $
            38,570,418






87
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


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





Condensed
      Statements of IncomeYear
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006IncomeDividend from
      subsidiary
            
            $
            1,000,000
            
            
            $
            1,000,000
            
            
            $
            -Interest income
            
            
            52,460
            
            
            
            86,492
            
            
            
            93,133Total
      income
            
            
            1,052,460
            
            
            
            1,086,492
            
            
            
            93,133Noninterest
      expenses
            
            
            219,758
            
            
            
            108,832
            
            
            
            125,627Income
      (loss) before equity in undistributed netincome of
    subsidiary
            
            
            832,702
            
            
            
            977,660
            
            
            
            (32,494
            )Equity
      in earnings of subsidiary, net of distributions
            
            
            2,939,614
            
            
            
            3,105,068
            
            
            
            4,275,362Income
      before income taxes
            
            
            3,772,316
            
            
            
            4,082,728
            
            
            
            4,242,868Income
      tax (benefit)
            
            
            (63,506
            )
            
            
            (8,480
            )
            
            
            (24,864
            )Net
      income
            
            $
            3,835,822
            
            
            $
            4,091,208
            
            
            $
            4,267,732





88
 Community
Financial Corporation
 and
Subsidiary
 
 Notes
to Consolidated Financial Statements
 (continued)


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





Condensed
      Statements of Cash FlowsYear
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006Operating
      activitiesNet income
            
            $
            3,835,822
            
            
            $
            4,091,208
            
            
            $
            4,267,732AdjustmentsEquity in earnings of subsidiary,
      net of distributions
            
            
            (2,939,614
            )
            
            
            (3,105,068
            )
            
            
            (4,275,362
            )(Increase) in prepaid and other
      assets
              Increase
      (decrease) in other liabilities
            
            
            27,939
              (6
            )
            
            
            (75,816
              (139
            )
              )
            
            
            (102,879
              12
            )Net
      cash provided by (used in) operating activities
            
            
            924,141
            
            
            
            910,185
            
            
            
            (110,497
            )Investing
      activitiesNet
      cash provided by investing activities
            
            
            -
            
            
            
            -
            
            
            
            -Financing
      activitiesCash dividends paid on common
      stock
            
            
            (1,120,639
            )
            
            
            (1,085,817
            )
            
            
            (944,549
            )Proceeds from issuance of common
      stock
            
            
            375,525
            
            
            
            336,941
            
            
            
            489,671Repurchase of common
      stock
            
            
            (80,739
            )
            
            
            -
            
            
            
            -Net
      cash (used in) financing activities
            
            
            (825,853
            )
            
            
            (748,876
            )
            
            
            (454,878
            )Increase
      (decrease) in cash
            
            
            98,288
            
            
            
            161,309
            
            
            
            (565,375
            )Cash, beginning of
      year
            
            
            667,352
            
            
            
            506,043
            
            
            
            1,071,418Cash, end of
      year
            
            $
            765,640
            
            
            $
            667,352
            
            
            $
            506,043










89




ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE




There has
been no current report on Form 8-K filed within 48 months prior to the date of
the most recent financial statements reporting a change in accountants and/or
reporting disagreements on any matter of accounting principle on financial
statements disclosure.




ITEM
9A.  CONTROLS AND PROCEDURES




An
evaluation of the Company’s disclosure controls and procedures (as defined in
Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of March
31, 2008, was carried out under the supervision and with the participation of
the Company's Chief Executive Officer, Chief Financial Officer and several other
members of the Company's senior management. The Corporation's Chief Executive
Officer and Chief Financial Officer concluded that the Corporation's disclosure
controls and procedures currently in effect are effective in ensuring that the
information required to be disclosed by the Company in the reports it files or
submits under the Act is: (i) accumulated and communicated to the Company's
management (including the Chief Executive Officer and Chief Financial Officer)
in a timely manner and (ii) recorded, processed, summarized and reported within
the time periods specified in the SEC's rules and forms. In addition, there have
been no changes in our internal control over financial reporting (as defined in
Rule 13a-15(f) of the Act) that occurred during the quarter ended March 31,
2008, that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.




The
Company does not expect that its disclosure controls and procedures and internal
control over financial reporting will prevent all errors and all fraud. A
control procedure, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control procedure
are met. Because of the inherent limitations in all control procedures, no
evaluation of controls can provide absolute assurance that all control issues
and instances of fraud, if any, within the Company have been detected. These
inherent limitations include the realities that judgments in decision-making can
be faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls may be circumvented by the individual acts of some
persons, by collusion of two or more people, or by override of the control. The
design of any control procedure also is based in part upon certain assumptions
about the likelihood of future events, and there can be no assurance that any
design will succeed in achieving its stated goals under all potential future
conditions; over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. Because of the inherent limitations in a cost-effective control
procedure, misstatements due to error or fraud may occur and not be
detected.




Management's
Report on Internal Control over Financial Reporting




The
management of Community Financial Corporation is responsible for establishing
and maintaining adequate internal control over financial
reporting.  This internal control system has been designed to provide
reasonable assurance to the Company’s management and board of directors
regarding the preparation and fair presentation of the Company’s published
financial statements.





All
internal control systems, no matter how well designed, have inherent
limitations.  Therefore, even those systems determined to be effective
can provide only reasonable assurance with respect to financial statement
preparation and presentation.





The
management of Community Financial Corporation has assessed the effectiveness of
the Company’s internal control over financial reporting as of March 31,
2008.  To make the assessment, we used the criteria for effective
internal control over financial reporting described in Internal Control –




90


Integrated
Framework, issued by the Committee of Sponsoring Organizations of the Treadway
Commission.  Based on our assessment, we believe that, as of March 31,
2008, the Company’s internal control over financial reporting was effective
based on those criteria.  This annual report does not include the
attestation report of the Corporation’s registered public accounting firm
regarding internal control over financial reporting.  Management’s
report was not subject to attestation by the Corporation’s registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit the Corporation to provide only management’s report in
this annual report.




ITEM
9B.  OTHER INFORMATION




None.




PART
III




ITEM
10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERANCE




Directors and
Executive Officers.Information concerning directors of the
Registrant is incorporated herein by reference from our definitive Proxy
Statement for the 2008 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 Item 1 of this report under the
caption “Executive Officers.”




Compliance with
Section 16(a).  Information concerning compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated herein by reference
from our definitive Proxy Statement for the 2008 Annual Meeting of Stockholders,
a copy of which will be filed not later than 120 days after the close of the
fiscal year.




Audit Committee
Matters and Audit Committee Financial Expert.  Information
concerning the audit committee of the Company’s Board of Directors, including
information regarding audit committee financial experts serving on the audit
committee, is incorporated herein by reference from the definitive Proxy
Statement for the 2008 Annual Meeting of Stockholders, a copy of which will be
filed not later than 120 days after the close of the fiscal year.




Code of
Ethics.The Company has adopted a written Code of Ethics based
upon the standards set forth under Item 406 of Regulation S-K of the Securities
Exchange Act.  The Code of Ethics applies to all of the Company’s
directors, officers and employees.  A copy of the Company’s Code of
Ethics was filed with the SEC as Exhibit 14 to its Annual Report on Form 10-KSB
for the year ended March 31, 2004 and as posted in the Investor Relations
section of our web site at www.cbnk.com.  You may obtain a copy of the
Code of Ethics free of charge from the Company by writing to the Secretary of
Community Financial Corporation at 38 North Central Avenue, Staunton, Virginia
24401, or by calling (540) 886-0796.




Nomination
Procedures.  There has been no material changes to the
procedures by which shareholders may recommend nominees to the Company’s Board
of Directors.




ITEM
11.  EXECUTIVE COMPENSATION




Information
concerning executive compensation is incorporated herein by reference from our
definitive Proxy Statement for the 2008 Annual Meeting of Stockholders, a copy
of which will be filed not later than 120 days after the close of the fiscal
year.






91




ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS




Information
concerning security ownership of certain beneficial owners and management is
incorporated herein by reference from our definitive Proxy Statement for the
2008 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.




The
following table summarizes our equity compensation plans as of March 31,
2008.




Equity Compensation
Plans


Plan
      Category
            
            Number
      of securities
              to
      be issued upon
              exercise
      of out-
              standing
      options,
              warrants
      and rights
            
            
            Weighted-average
              exercise
      price of
              outstanding
      options,
              warrants
      and rights
            
            
            Number
      of securities
              remaining
      available
              for
      future issuance
              under
      equity
              compensation
      plans
              (excluding
      securities
              reflected
      in column)Equity
      compensation
              plans
      approved by
              security
      holders
            
            
            429,000
            
            
            $
            8.28
            
            
            
            15,800Equity
      compensation
              plans
      not approved
              by
      security holders
            
            
            0
            
            
            
            0
            
            
            
            0Total
            
            
            429,000
            
            
            $
            8.28
            
            
            
            15,800





The
number of shares available for issuance are adjusted for changes in
capitalization due to reorganization, recapitalization, stock splits, stock
dividends combination or exchange of shares, merger, consolidation or any change
in the corporate structure.




ITEM
13.  CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE




Information
concerning certain relationships and transactions and director independence is
incorporated herein by reference from our definitive Proxy Statement for the
2008 Annual Meeting of Stockholders, a copy of which will be filed not later
than 120 days after the close of the fiscal year.




ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES




Information
concerning fees and services by our principal accountants is incorporated herein
by reference from our definitive Proxy Statement for the 2008 Annual Meeting of
Stockholders, a copy of which will be filed not later than 120 days after the
close of the fiscal year.




PART
IV




ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES




See
Exhibit Index.




92


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 CORPORATIONDate:     June
      27, 2008
            By:
            /s/
      P. Douglas RichardP.
      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
      DirectorDate:
            June
      27, 2008
            Date:
            June
      27, 2008By:
            /s/
      Jane C. Hickok
            By:
            /s/
      Charles F. AndersenJane
      C. Hickok
              Vice
      Chairman of the Board
              and
      Director
            
            Charles
      F. Andersen
              DirectorDate:
            June
      27, 2008
            Date:
            June
      27, 2008By:
            /s/
      Dale C. Smith
            By:
            /s/
      Morgan N. Trimyer, Jr.Dale
      C. Smith
              Director
            
            Morgan
      N. Trimyer, Jr.
              DirectorDate:
            June
      27, 2008
            Date:
            June
      27, 2008By:
            /s/
      R. Jerry Giles
            By:
            /s/
      Charles W. FairchildsR.
      Jerry Giles
              Chief
      Financial Officer
              (Principal
      Financial and     Accounting Officer)
            
            Charles
      W. Fairchilds
              DirectorDate:
            June
      27, 2008
            Date:
            June
      27, 2008




93






INDEX
TO EXHIBITS




Regulation
              S-K
      Exhibit
              Number
            
            Document3.1
            
            Amended
      and Restated Articles of Incorporation, filed on July 5, 1996 as an
      exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A
      (SEC File No. 000-18265), are incorporated herein by
      reference.3.2
            
            Bylaws,
      as amended and restated and currently in effect, filed on December 20,
      2007 as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (SEC
      File No. 000-18265), is incorporated herein by
  reference.4
            
            Registrant’s
      Specimen Common Stock Certificate, filed on June 29, 1999 as Exhibit 4 to
      the Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal
      year ended March 31, 1999, is incorporated herein by
      reference.10.1
            
            Amended
      and Restated Employment Agreement by and between Community Bank and P.
      Douglas Richard, filed on May 5, 2006, as Exhibit 99.2 to the Registrant’s
      Current Report on Form 8-K (SEC File No. 000-18265), is incorporated
      herein by reference.10.2
            
            Form
      of Change in Control Agreement by and between Community Financial
      Corporation and each of P. Douglas Richard and Chris P. Kyriakides, filed
      on May 5, 2006 as Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K (SEC File No. 000-18265), is incorporated herein by
      reference.10.3
            
            Registrant’s
      1996 Incentive Plan, filed on July 5, 1996 as an exhibit to the
      Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No.
      000-18265), is incorporated herein by reference.10.4
            
            Amended
      and Restated Employment Agreement by and between Community Bank and Chris
      P. Kyriakides, filed on May 5, 2006 as Exhibit 99.3 to the Registrant’s
      Current Report on Form 8-K (SEC File No. 000-18265), is incorporated
      herein by reference.10.5
            
            Form
      of Change in Control Agreement by and between Community Financial
      Corporation and each of R. Jerry Giles, and Benny N. Werner, filed on May
      5, 2006 as Exhibit 99.5 to the Registrant’s Current Report on Form 8-K
      (SEC File No. 000-18265), is incorporated herein by
    reference.10.6
            
            Retirement
      Agreements by and between Community Bank and Non-Employee Directors filed
      on June 29, 2004 as an exhibit to the Registrant’s Annual Report on Form
      10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 2004,
      and incorporated here by reference.10.7
            
            Form
      of First Amendment to the Retirement Agreements by and between Community
      Bank and Non-Employee Directors, filed on June 29, 2005 as an exhibit to
      the Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for
      the fiscal year ended March 31, 2005, is incorporated here by
      reference.








94






10.8
            
            Salary
      Continuance Agreements by and between Community Bank and Officers Richard,
      Kyriakides, Giles, Smiley and Werner filed on June 29, 2004 as an exhibit
      to the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-18265)
      for the fiscal year ended March 31, 2004, and incorporated here by
      reference.10.9
            
            Form
      of Director Deferred Fee Agreement, as amended, filed on June 29, 2005 as
      an exhibit to the Registrant’s Annual Report on Form 10-K (SEC File No.
      000-18265) for the fiscal year ended March 31, 2005, is incorporated here
      by reference.10.10
            
            Registrant’s
      2003 Stock Option and Incentive Plan, filed on June 27, 2003 as an exhibit
      to the Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File
      No. 000-18265), is incorporated herein by reference.10.11
            
            Form
      of Incentive Stock Option Agreement and Non-Qualified Stock Option
      Agreement for Registrant’s 2003 Stock Option and Incentive Plan, filed on
      August 12, 2005 as an exhibit to the Registrant’s Quarterly Report on Form
      10-Q (SEC File No. 000-18265) for the quarter ended June 30, 2005, are
      incorporated herein by reference.10.12
            
            Employment
      Agreement by and between Community Bank and Norman C. Smiley, III, filed
      on June 16, 2008 as an exhibit to the Registrant’s Current Report on Form
      8-K (SEC File No. 000-18265), is incorporated herein by
      reference.10.13
            
            Change
      in Control Agreement by and between Community Financial Corporation and
      Norman C. Smiley, III, filed on June 16, 2008 as an exhibit to the
      Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is
      incorporated herein by reference.11
            
            Statement
      re computation of per share earnings (see Note 12 of the Notes to
      Consolidated Financial Statements included in Item 8 of this Annual Report
      on Form 10-K).14
            
            Code
      of Ethics, filed on June 29, 2004 as an exhibit to the Registrant’s Annual
      Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended
      March 31, 2004, and incorporated here by reference.21
            
            Subsidiaries
      of the Registrant, filed on June 29, 2005 as an exhibit to the
      Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for the
      fiscal year ended March 31, 2005, is incorporated here by
      reference.23
            
            Consent
      of Independent Auditors31.1
            
            Rule
      13(a)-14(a) Certification (Chief Executive Officer)31.2
            
            Rule
      13(a)-14(a) Certification (Chief Financial Officer)32
            
            Section
      1350 Certifications







95