[FRONT COVER]


[Community Financial Corporation Logo]

Community Financial Corporation







Our name really does say it all!





2000
ANNUAL
REPORT

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<S>                                               <C>                           <C>                           <C>
[Community Financial Corporation Logo]            Contents
                                                  1       Selected Consolidated Financial Data
Community Financial Corporation                   2       Letter to Stockholders
                                                  4       Board of Directors
NASDAQ Symbol - CFFC                              9       Management's Discussion
                                                  17      Report of Independent Certified Public Accountants
EXECUTIVE AND ADMINISTRATIVE OFFICES:             18      Consolidated Financial Statements
38 North Central Avenue                           39      Stockholder Information
Staunton, Virginia 24401
(540) 886-0796                                    COMMUNITY  BANK  EMPLOYEES
Fax: (540) 885-0643
E-Mail: cbnk@cbnk.com                             Kim Aldhizer                  Robert Hoffman                Janet Redifer
Web Address:  www.cbnk.com                        Judy Botkin                   Shirley Holbrook              Doug Richard
                                                  Jennifer Boxler               Lisa Hovland                  Pamela Ritchie
RETAIL BANKING OFFICES:                           Ellen Boyd                    Carolyn Howell                Kim Roberson
Downtown Office                                   Janet Braithwaite             Kristie Johnson               Dana Rogers
38 North Central Avenue                           Deborah Burnett               Teresa Knapton                Connie Savage
Staunton, Virginia 24401                          Patti Butler                  Ellen Kutchak                 Ramona Savidge
(540) 886-0796                                    Dianne Campbell               Chris Kyriakides              Karen Sheehan
                                                  Martha Chandler               Lisa LaMay                    Lynn Sisson
Richmond Road Branch                              Amanda Clark                  Patricia Lane                 Butch Smiley
101 Community Way                                 Patsy Clem                    Teresa Layne                  Hope Smith
Staunton, Virginia 24401                          Stacy Clemmer                 Tonna Lotts                   Lona Smith
(540) 213-3888                                    Michelle Coffey               Marcie Mader                  Kimberly St. Clair
                                                  Neva Collins                  Virginia McCormack            Susan Swisher
Waynesboro Branch                                 Gary Davenport                Pam McGovern                  Carey Taylor
2934 West Main Street                             Charlott Dean                 Hugh McMenamin                Linda Turner
Waynesboro, Virginia 22980                        Kay Dean                      Emilie Mehrtens               Sarah Tyree
(540) 943-5000                                    Diana Decker                  Peggy Miller                  Glenn VanLear
                                                  Grace Dick                    Lyle Moffett                  Jeff Wagner
Stuarts Draft Branch                              Maria Dimapelis               Lovetta Moore                 Tom Wagner
2658 Stuarts Draft Highway                        Renee Fangman                 Rosalie Moster                Benny Werner
Stuarts Draft, Virginia 24477                     Danny Fields                  Angel Negron, Jr.             Ann Wescott
(540) 337-1514                                    Ariel Fix                     Heather Nelson                Connie West-Williams
                                                  Jim Fordham                   Niki Orebaugh                 Courtney Williams
HAMPTON ROADS REGION:                             Kristie Frieberg              Jane Orem                     Kathy Willis
Regional Headquarters                             Wanda Garrison                Janice Pappas                 Dee Wimer
621 Nevan Road                                    Jerry Giles                   Catherine Pauly               Stephanie Wimer
Virginia Beach, Virginia 23451                    Jacelyn  Hailstalk            Wendi Pell                    Barbara Wood
(757) 491-8810                                    Alisha  Hammer                Kristie Powell                John Woods
                                                  Janalin Hill                  Lee Ralston-Shaner
Kemps River Branch
5300 Kemps River Drive, Suite 100
Virginia Beach, Virginia 23464
(757) 424-5600                                                                    [PICTURE]

COMMUNITY FIRST MORTGAGE CORPORATION:
Main Office
9201 Arboretum Parkway, Suite 210
Richmond, Virginia 23236
(804) 330-9800

Staunton Office
101 Community Way
Staunton, Virginia 24401
(540) 213-3770

Virginia Beach Office
621 Nevan Road, Suite 201
Virginia Beach, Virginia 23451
(757) 491-0743

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<TABLE>
<CAPTION>
Selected Consolidated Financial Data
                                                                        At March 31,
                                                                        ------------
                                                     2000       1999       1998       1997       1996
                                                     ----       ----       ----       ----       ----
                                                                      (In Thousands)
<S>                                               <C>        <C>        <C>        <C>        <C>
Selected Financial Condition Data:
Total assets                                      $243,077   $200,810   $183,894   $167,707   $159,793
Loans receivable, net                              189,701    171,414    162,471    148,905    141,739
Investment securities & other earning assets(1)     38,074     17,020      8,976      9,865     10,319
Real estate owned, net                                 823        352        303        173        123
Deposits                                           158,568    153,015    138,164    116,595    109,501
Advances and other borrowed money                   57,000     19,000     18,000     26,000     27,000
Stockholders' equity                                25,394     26,384     25,515     23,337     21,900


                                                                    Year Ended March 31,
                                                                    --------------------
                                                     2000       1999       1998       1997       1996
                                                     ----       ----       ----       ----       ----
                                                                      (In Thousands)
Selected Operations Data:
Total interest income                             $ 16,154   $ 14,258   $ 13,949   $ 12,778   $ 12,388
Total interest expense                               8,715      7,332      7,316      6,536      6,516
Net interest income                                  7,439      6,926      6,633      6,242      5,872
Provision for loan losses                              283        360        498        180        307
Net interest income after provision
   for loan losses                                   7,156      6,566      6,135      6,062      5,565
Service charges and fees on loans                    2,410      1,328        757        510        431
Gain on sale of securities                             601      1,225         --         --         --
Other noninterest income(2)                            185         85          9          9         25
Noninterest expenses                                 8,258      6,028      4,017      3,806      2,809
Income before income taxes                           2,094      3,176      2,884      2,775      3,212
Income taxes                                           770      1,328      1,079      1,040      1,200
Net income                                        $  1,324   $  1,848   $  1,805   $  1,735   $  2,012

                                                          At or for the Year Ended March 31,
                                                          ----------------------------------
                                                     2000       1999       1998       1997       1996
                                                     ----       ----       ----       ----       ----
                                                                      (In Thousands)
Other Data:
Interest-earning assets to
    interest-bearing liabilities                    107.30%    111.43%    111.47%    112.70%    111.40%
Average interest rate spread during year              3.30       3.45       3.42       3.49       3.42
Non-performing assets to total assets                  .52        .76        .51        .40        .50
Return on assets (ratio of net
    income to average total assets)                    .60        .96       1.03       1.06       1.28
Return on equity (ratio of net
    income to average equity)                         5.11       7.12       7.39       7.67       9.71
Equity-to-assets ratio (ratio of
    average equity to average assets)                11.66      13.52      13.89      13.81      13.23

Per Share Data:
Net income - diluted                              $    .52   $    .71   $   0.70   $    .68   $    .80
Book value                                           10.11      10.26       9.97       9.15       8.63
Dividends                                              .32        .31        .28        .27        .21
Dividend payout ratio                                61.90%     43.11%     39.60%     38.69%     26.30%
Number of full-service offices                           6          5          4          4          3
</TABLE>

(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)  Includes  a  special  one-time  assessment  of  approximately  $671,000  to
capitalize the SAIF insurance fund.

                                                                               1
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[THREE PICTURES]


Dear Stockholder:

The past year was both a  challenging  and exciting  time for your Bank.  Assets
increased by $42.3 million or 21.0%,  while loans  increased by $18.3 million or
10.6%, and securities  purchased increased $25.5 million.  Despite the growth in
interest  earning  assets,  earnings for the year were $1.32 million or $.52 per
share down from $1.85 million or $.71 per share the previous year. However, when
nonrecurring  expense and income items are deleted  from both years,  the result
was substantially flat earnings for this past year. The decrease in earnings was
attributed to the costs associated with the Bank's expansion efforts which began
as early as three years ago.

The Bank  expanded  into the  Hampton  Roads  market  in  April  1997,  with the
organization  of a Regional Bank and branch  office.  In December 1998, a second
branch was opened in  Virginia  Beach.  We are pleased to report that the Region
became  profitable in April 1998, and as of this date the Region's earnings have
exceeded  the Bank's  investment.  The Region  currently  has loans  outstanding
exceeding  $37 million  with $21 million in deposits and is expected to continue
to grow and contribute to the Bank's profitability.

In November 1997, the Bank formed a mortgage banking subsidiary, Community First
Mortgage.  The principal  business of the Mortgage  Corporation  is to originate
residential  fixed rate  mortgages  and sell them on the secondary  market.  Its
purpose  is to  increase  the  Bank's  fee  income  capabilities  and expand the
products and services that we can offer. Due to the highly competitive  economic
environment at the time, Community First found it very difficult to attract high
volume originators and as a result,  production and profitability have suffered.
It has therefore taken longer than expected for Community First to contribute to
the Bank's  profitability;  however, we are optimistic that Community First will
begin to contribute to the  Company's  earnings  during the coming year. We base
our  assumptions on several  things.  Despite  rising  interest  rates,  we have
experienced a marked improvement in loan originations during the past six months
and our current  production  is at its  highest  level.  The recent  accelerated
consolidation  in the mortgage  banking  business has allowed our  management to
attract a talented pool of loan originators. The unprofitable wholesale division
has been eliminated and a construction  loan program has been  instituted  which
has proven to be profitable.  Community First has a talented and dedicated staff
who are  committed  to the  success of the  operation  and have taken every step
possible to insure  that  Community  First  contributes  to the Bank's  earnings
during the coming year.

This past year our newest  Staunton  office,  on  Richmond  Road,  was opened in
September.  We are pleased  with its  performance  thus far,  which has produced
deposits in excess of $5 million.  This  location  gives the Bank a  much-needed
expanded  presence  in our  market  from  which to  better  serve  the  Staunton
community.  Please take time to visit this office if you have not  already,  and
allow  our  knowledgeable  staff  to  show  you the  facility  and  provide  you
information on our products and services.

In the midst of this  expansion,  the Bank also installed a new data  processing
system to insure our  compliance  with the Y2K  requirements.  We're  pleased to
report that the turn of the century was a  "nonevent"  and did not impact any of
the Bank's systems.  This computer  conversion was a major  undertaking for your

2
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[BAR GRAPHS: EARNINGS PER SHARE -- NET INCOME -- STOCKHOLDERS' EQUITY TO AVERAGE
ASSETS -- TOTAL ASSETS]



Bank.  It required  many hours of  preparation  in 1998,  with 1999 as a year of
further training and familiarization with the system.

You may have experienced some  inconvenience  over the past year, as a result of
this  conversion;  if so, we apologize.  It has been said that progress does not
come without a price and this conversion was no exception.

As you can see, the past several years have been very active for your Bank. Many
times expansion  impacts  short-term  profitability and we have experienced this
phenomenon  this past year.  Your Board and  Management  feel that it is time to
pause and refocus  our  energies on  improving  profitability.  We have built an
infrastructure during the past three years that has given the Bank future growth
capacity and we now intend to take full advantage of it.

Community  Bank has been built on the  premise of friendly  attitudes,  superior
service and competitive  products.  We have every reason to face the future with
optimism and confidence  that we will continue to emphasize  these  qualities in
conjunction with controlled, profitable growth.

We would like to thank the Staff,  our leaders on the Board,  our  Customers and
Stockholders  for their  enthusiasm  and  commitment to the success of Community
Bank. We look forward to serving our communities for many years to come.

/s/ James R. Cooke, Jr.                      /s/ P. Douglas Richard

James R. Cooke, Jr.                          P. Douglas Richard
Chairman of the Board                        President & CEO


                                                                               3
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                                                       HAMPTON ROADS BOARD OF DIRECTORS
<S>                                                    <C>
[PICTURE]                                              [PICTURE]

BOARD OF DIRECTORS                                     Pictured, left to right:  Chris P. Kyriakides,
Pictured left to right:  Kenneth L. Elmore,            robert M. Thornton, William R. Waddell,
James R. Cooke, Jr., D.D.S., P. Douglas Richard,       James R. Cooke, Jr., Cerard Harrison,
Jane C. Hickok, Charles F. Andersen, M.D.,             P. Douglas Richard, Leslie Watson.
Dale C. Smith, Charles W. Fairchilds                   Not pictured:  Morgan N. Trimyer, Jr.



Charles F.  Anderson,  M.D.  Dr.  Anderson is an       OFFICERS
orthopedic   surgeon  in  private   practice  in
Waynesboro, Virginia.                                  P. Douglas Richard..................President & CEO
                                                       R. Jerry Giles..............Chief Financial Officer
Kenneth L.  Elmore.  Mr.  Elmore is a partner of       Benny N. Werner...............Senior Vice President
Elmore,  Hupp  &  Company,  a  certified  public       Angel Negron, Jr.....................Vice President
accounting  firm located in Staunton,  Virginia.       Norman C. (Butch) Smiley, III........Vice President
Mr.   Elmore   has  been  a   certified   public       Lynn P. Sisson.......................Vice President
accountant for over 30 years.  Mr. Elmore's term       Patsy D. Clem.............Controller/Vice President
will  expire  at the  July,  2000  stockholders'       Chris P. Kyriakides..............Regional President
meeting and he has  expressed  his  intention to       Robert M. (Bobby) Hoffman...Regional Vice President
retire from the Board of Directors.                    Jane P. Orem................Regional Vice President
                                                       Kathy H. Willis.............Regional Vice President
Jane C. Hickok.  Mrs. Hickok was elected as Vice       Ellen H. Boyd..............Assistant Vice President
Chairman of the Board in October  1994.  She had       Dianne F. Campbell.........Assistant Vice President
previously   retired  as  President   and  Chief       Kay T. Dean................Assistant Vice President
Executive  Officer  of  Community  Bank  in 1994       Danny R. Fields Assistant............Vice President
after  serving   since  1984.   She  retired  as       Virginia M. McCormack......Assistant Vice President
President   and  Chief   Executive   Officer  of       Ramona W. Savidge..........Assistant Vice President
Community Financial Corporation in January 1995.       Thomas R. Wagner...........Assistant Vice President
Mrs. Hickok  continues to serve as a director of       Gary L. Davenport..........Assistant Vice President
Community  Financial  and Community  Bank.  Mrs.       Martha B. Chandler..............Assistant Secretary
Hickok was  elected as a director  of  Community
Bank  in 1983  and as a  director  of  Community
Financial  in 1990  when it became  the  holding
company of Community Bank.

Dale C. Smith.  Mr. Smith is the General Manager
and     Chief      Executive      Officer     of
Augusta-Cooperative  Farm  Bureau,  Inc., a farm
supply and retail store in Staunton, Virginia.

James R. Cooke,  Jr., D.D.S. Dr. Cooke has been,
for the past 30 years,  a practicing  dentist in
Staunton, Virginia.

P. Douglas Richard. Mr. Richard was appointed as
Regional  President of the Bank's  Hampton Roads
region  in 1997.  Mr.  Richard  was  elected  as
President   and  Chief   Executive   Officer  of
Community Financial and Community Bank in April,
2000. Prior to joining Community Financial,  Mr.
Richard  was  President   and  Chief   Executive
Officer of Seaboard Bancorp in Hampton Roads.

Charles W. Fairchilds.  Mr.  Fairchilds has been
the President of Allied Ready Mix in Waynesboro,
Virginia since 1987.
</TABLE>


4
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[THREE PICTURES]


IN  1929  -  ONLY  ONE  YEAR  AFTER  COMMUNITY  BANK  opened  its  doors  in the
Staunton-Augusta  County area - the Great Depression descended on the nation and
robbed it of its economic vitality.  Jobless lines stretched for blocks;  family
homesteads were lost; soup kitchens  abounded;  and banks, once a bulwark of the
American economy, went out of business by the hundreds.

But not  Community  Bank.  Situated  in one of the  most  fiscally  conservative
sections of Virginia,  our robust local bank combined its  philosophy of being a
good neighbor with sound  financial  stewardship  to weather the worst  economic
crisis the nation had ever seen.  And not only did Community  Bank withstand the
storm, it thrived - and made sure the people it served thrived, as well.

Today,  many things have  changed.  The economy  skyrockets to new heights every
day.  Prosperity  is  available  for  all  who  work to  achieve  it.  Financial
institutions  are  once  again  a  mainstay  of the  American  economy.  But one
overriding element has conspicuously remained the same:

COMMUNITY BANK'S UNWAVERING LOYALTY TO THE PEOPLE IT SERVES.

For Community Bank, "Our Name Really Does Say it All" is more than just a slogan
or marketing tool. It's the crux of who we are and what we're all about.  Behind
those words stand 72 years of constant and consistent service, of making sure we
know and respond to the needs of the customer,  of building  trust and following
through on our commitment to serve.


                                                                               5
<PAGE>


[PICTURE - OUR  EMPLOYEES  GAVE OF THEIR  PERSONAL  TIME TO RAISE  MONEY FOR THE
MARCH OF DIMES]

[PICTURE - COMMUNITY BANK HELPS SPONSOR STAUNTON'S LOCAL FARMER'S MARKET.]


THE COMMUNITY BANK DIFFERENCE

MARK TWAIN  ONCE SAID,  "The  difference  between  the right word and almost the
right word is the difference  between  lightning and a lightning  bug." The same
holds  true for the right bank and the  almost  right bank - and the  difference
between them is what has given  Community Bank the resounding  success it enjoys
today.

For Community  Bank,  the current  trend to merge into an  impersonal  financial
giant holds no attraction.  For us, it's the personal touch that matters. A face
with a name. A neighbor helping a neighbor.  A bank with old-fashioned  strength
and trust and an up-to-date knowledge of the community it serves.

Our customers tell us they like walking into Community Bank and being recognized
by the people they consider their friends and neighbors. They like the fact that
they can apply for a loan  face-to-face  with the people  making the  decisions.
They  like the  feeling  of  loyalty  and trust the  Community  Bank  difference
inspires.

But quality,  hometown banking and individualized  service isn't all there is to
Community Bank's personal touch. It extends,  even, beyond the construction of a
new,  convenient  location  on  Richmond  Road  and  the  recent  election  of a
community-oriented  president  and CEO. No,  Community  Bank takes its role as a
member of the  community  very  seriously  and  assumes an active,  high-profile
responsibility in making sure it remains a place we all want to live.

Since the  essence of any  community  flows from the  commitment  of its people,
Community  Bank  involves  itself in many  local  projects  designed  to enhance
quality of life and engender a spirit of cooperation.  Whether it's working with
children  to  build  solid   citizens  for  the  future,   increasing   cultural
opportunities,  supporting  historic  preservation  or serving on public service
boards and  committees,  the people of Community Bank give  unselfishly of their
time and talents toward the common good.

They are our greatest  resource and our greatest source of pride.  Through them,
we are inextricably woven with the community we seek to serve.

Real community involvement. It's the Community Bank difference - a difference we
enjoy and one we are proud to continue.


6
<PAGE>


[PICTURE  -  OUR  OWN  LYNN  SISSON  DRESSED  TO  CELEBRATE   COMMUNITY   BANK'S
PARTICIPATION IN STAUNTON'S ANNUAL VICTORIAN  FESTIVAL.]

LOOKING AHEAD WITH NEW RESOURCES

IN MAY 2000,  Community  Financial  Corporation  announced  the  election  of P.
Douglas Richard as President, Chief Executive Officer and member of the Board of
Community Financial Corporation and its subsidiary, Community Bank.

Richard,  56, is a native of Hampton Roads,  Virginia,  and has been employed in
the financial services industry since 1970. He was President and Chief Executive
Officer of Seaboard  Savings Bank in Virginia  Beach prior to joining  Community
Bank as President of its Hampton Roads region, which he helped organize in 1997.


Richard is no stranger to the  Shenandoah  Valley,  as he is a 1966  graduate of
Virginia  Military  Institute.  "I am excited to return to the Shenandoah Valley
and to be associated  with an  organization  which has such a rich  tradition of
serving  this  community  since  1928,"  Richard  said.  "Community  Bank has an
extraordinary  staff of  professionals  with many  years of  experience  who are
focused on  providing  the best  service  and most  competitive  products in the
market.  I am pleased to be part of this team and I look  forward to  becoming a
member of the Staunton-Augusta County community."

Chris P. Kyriakides  succeeded  Richard as President of Community Bank's Hampton
Roads Region.  Kyriakides  has been the Executive  Vice  President of the region
since its organization.


Kyriakides  is a native of  Cyprus  and a 1984  graduate  of the  University  of
Virginia with a degree in economics. He was Executive Vice-President of Seaboard
Savings Bank prior to joining Community Bank in 1997.

These two professionals  bring to their respective roles deep commitments to the
betterment of their  communities and to the  strengthening of the ties that have
made Community Bank a trusted financial leader.

VITALITY THROUGH VARIETY

IN ADDITION TO INDIVIDUALIZED  ATTENTION and a genuine concern for the people it
serves,  Community  Bank  continues  to grow,  change,  improve  and  succeed by
offering the best  financial  services in the area.  Through a range of personal
and business  checking  options - from Totally Free to Ultimate - Community Bank
customers can attain the financial  flexibility they need. Overdraft Protection,
Check Safekeeping,  Small Business Checking, Non-Profit Checking and much more -
we pride ourselves on the diversity of our offerings.

Checking account diversity is only part of the Community Bank picture. Community
Bank's  traditional  real  estate  lending  has  been an  important  part of our
expertise in our communities.  Qualified  borrowers can tailor mortgages to meet
their  specific  needs  - not  get  lumped  together  in a  pre-packaged  set of
financial  boundaries.  Home  Equity  Installment  Loans  and  Lines of  Credit,
Automobile and Personal Loans, Savings/CD Loans - these options and more make it
possible for you to attain the varied financial goals that are important to you.

While  variety  is,  indeed,  the spice of life,  it is also the  vitality  of a
community-based  and  service-oriented  bank. And no one does it better, or with
greater vitality, than Community Bank.


                                                                               7
<PAGE>


[THREE PICTURES -- RICHMOND ROAD BRANCH CELEBRATES GRAND OPENING.]

THE COMMUNITY BANK CARE PACKAGE

In the year to come, Community Bank will build on the foundation of trust it has
established  since 1928 and  promote  its role as both a  financial  partner and
adviser.  By doing  what it does  best -  serving  as a  reliable  resource  for
financial and business needs - Community Bank will continue to instill long-term
loyalty among its customers and bolster an already superior  bank/client working
relationship.

That relationship can grow through the enduring person-to-person, individualized
services  we've become known for;  through  in-school  educational  programs and
tours of our  facilities;  and through our  willingness to always listen to what
our customers have to say.

Those elements,  combined with the use of cutting-edge technology and the hiring
and training of the very best employees,  serve to position us as a local market
leader in community banking.


Community. Advice. Relationships.  Exceptional service. CARE. It's a package for
success, for the future and - most importantly - for the community that means so
much to us.


8
<PAGE>

                              MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS

INTRODUCTION

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

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

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

ASSET/LIABILITY
MANAGEMENT

     Management  believes  it is  critical  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, 2000 and 1999,  is an
analysis of Community  Bank's  interest  rate risk as measured by changes in net
portfolio  value for  instantaneous  and sustained  parallel shifts in the yield
curve, in 100 basis point increments,  up and down 300 basis points and compared
to  board  global  policy  limits  and  in  accordance  with  Office  of  Thrift
Supervision  regulations,  based on the assumptions  described  below. The Board
limits have been established with  consideration of the dollar impact of various
rate  changes and our strong  capital  position.  As  illustrated  in the table,
Community  Bank's net portfolio value is slightly more sensitive to rising rates
than declining rates. This occurs principally because, as rates rise, the market
value of  fixed-rate  loans  decline due to both the rate  increase  and slowing
prepayments.  When interest  rates  decline,  we do not experience a significant
rise in market value for these loans because borrowers prepay at relatively high
rates. The value of our deposits and borrowings change in approximately the same
proportion in rising or falling rate scenarios.

                                                                               9
<PAGE>



COMMUNITY FINANCIAL CORPORATION

<TABLE>
<CAPTION>
                                            March 31, 2000               March 31, 1999
                                            --------------               --------------
         Change in
        Interest Rate   Board Limit    $ Change       % Change      $ Change        % Change
        (Basis Points)   % Change       in NPV         in NPV        in NPV          in Npv
-----------------------------------------------------------------------------------------------
                                          (Dollars in Thousands)
        <S>               <C>         <C>               <C>          <C>               <C>
        +300              -40%        $-10,701          -36%         $-2,488           -8%
        +200              -30           -6,883          -23           -1,150           -4
        +100              -20           -3,261          -11             -324           -1
         -0-               --               --           --               --           --
        -100              -20            2,345            8              220            1
        -200              -30            3,832           13              636            2
        -300              -40            5,588           19            1,466            5
</TABLE>

     Management  generally  works  to  maintain  a  neutral  position  regarding
interest rate risk. In the current interest rate environment,  our customers are
interested  in  obtaining  long term  credit  products  and short  term  savings
products.  Management  has taken  action to counter  this trend.  A  significant
effort has been made to reduce the  duration  and average  life of our  interest
earning  assets.  As of March 31,  2000,  approximately  72% of our  gross  loan
portfolio  consisted  of loans  which  reprice  during the life of the loan.  We
emphasize  adjustable  rate mortgage  loans and have  increased our portfolio of
short-term  consumer  loans.  Longer term  fixed-rate  mortgage  loans, 20 to 30
years, are generally sold in the secondary market. We are currently  originating
fixed-rate loans for immediate sale only through our subsidiary, Community First
Mortgage.

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

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

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

10
<PAGE>


                                                 COMMUNITY FINANCIAL CORPORATION

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 monthly basis.  Non-accruing
loans have been included in the table as loans carrying a zero yield.

<TABLE>
<CAPTION>
                                                                               Year Ended March 31,
                                  --------------------------------------------------------------------------------------------------
                                                 2000                                1999                             1998
                                  -------------------------------    --------------------------------    ---------------------------
                                  Average                 Yield/     Average                   Yield/    Average              Yield/
                                  Balance      Interest    Cost      Balance      Interest      Cost     Balance    Interest   Cost
                                  -------      --------    ----      -------      --------      ----     -------    --------   ----
                                                                             (Dollars in Thousands)
Interest-Earning Assets
-----------------------
<S>                              <C>          <C>          <C>       <C>          <C>           <C>      <C>        <C>        <C>
Loans                            $178,801     $ 14,566     8.15%     $162,861     $ 13,666      8.40%    $158,057   $ 13,344   8.44%
Investment securities
and other investments              27,254        1,588     5.83        13,459          592      4.40       11,665        605   5.18
                                  -------       ------                -------       ------                -------     ------
Total interest-earning
assets                            206,055       16,154     7.84       176,320       14,258      8.09      169,722     13,949   8.22
                                  -------       ------                -------       ------                -------     ------

Interest-Bearing Liabilities
----------------------------

Deposits                          151,057        6,380     4.22       141,789        6,387      4.50      126,689      5,845   4.61
FHLB advances and
other borrowings                   40,985        2,336     5.70        16,445          945      5.75       25,572      1,471   5.75
                                  -------        -----                -------        -----                -------      -----
Total interest-
bearing liabilities               192,042        8,716     4.54       158,234        7,332      4.64      152,261      7,316   4.80
                                  -------        -----                -------        -----                -------      -----

Net interest income/
interest rate spread                            $7,438     3.30                     $6,926      3.45                  $6,633   3.42
                                                ======                              ======                            ======
Net interest-earning
assets/net yield on
interest-earning assets           $14,013                  3.61       $18,086                   3.93      $17,461              3.91
                                  =======                             =======                             =======
Percentage of interest-earning
assets to interest-
bearing liabilities               107.30%                             111.43%                             111.47%

</TABLE>

                                                                              11
<PAGE>



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

                                                                March 31,
                                                       -------------------------
                                                       2000      1999      1998
                                                       ----      ----      ----
Yield on
--------
Loans                                                  8.36%     8.02%     8.29%
Investment securities and other investments            6.36%     4.50%     4.49%
    Total interest-earning assets                      8.03%     7.74%     8.04%

Cost of
-------
Deposits                                               4.27%     4.32%     4.60%
FHLB advances and other borrowings                     6.49%     5.60%     5.77%
    Total interest-bearing liabilities                 4.86%     4.46%     4.74%

INTEREST RATE SPREAD                                   3.17%     3.28%     3.30%


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

<TABLE>
<CAPTION>
                                                                      Year Ended March 31,
                                                      2000 v. 1999                            1999 v. 1998
                                          ----------------------------------    ------------------------------------
                                               Increase                                Increase
                                              (Decrease)                              (Decrease)
                                                Due to              Total               Due to              Total
                                          --------------------     Increase     ---------------------      Increase
                                           Volume       Rate      (Decrease)     Volume        Rate       (Decrease)
                                           ------       ----      ----------     ------        ----       ----------
                                                                      (Dollars in Thousands)

<S>                                       <C>         <C>          <C>          <C>          <C>          <C>
INTEREST-EARNING ASSETS
Loans                                     $ 1,299     $  (399)     $   900      $   385      $   (63)     $   322
Investments securities and other
   investments                                804         192          996           78          (91)         (13)
                                          -------     -------      -------      -------      -------      -------
   Total interest-earnings assets         $ 2,103     $  (207)     $ 1,896      $   463      $  (154)     $   309
                                          =======     =======      -------      =======      =======      -------
INTEREST-BEARING LIABILITIES
Deposits                                  $   391     $  (398)     $    (7)     $   681      $  (139)     $   542
FHLB advances and other borrowings          1,398          (7)       1,391         (526)          --         (526)
                                          -------     -------      -------      -------      -------      -------
   Total interest-bearing liabilities     $ 1,789     $  (405)     $ 1,384      $   155      $  (139)     $    16
                                          =======     =======      -------      =======      =======      -------

NET INTEREST INCOME                                                $   512                                $   293
                                                                   =======                                =======
</TABLE>

12
<PAGE>



                                                 COMMUNITY FINANCIAL CORPORATION

ASSET QUALITY
--------------------------------------------------------------------------------

     Asset  quality is an  important  factor in the  successful  operation  of a
financial institution. The loss of interest income and principal that may result
from  non-performing  assets  has an  adverse  effect  on  earnings,  while  the
resolution of those assets requires the use of capital and managerial resources.

     At  March  31,   2000,   total   non-performing   assets,   consisting   of
non-performing  loans and real estate  owned,  were  $1,217,000 or .52% of total
assets compared to $1,518,000 or .76% at March 31, 1999.  Non-performing  assets
at March 31,  2000 were  comprised  primarily  of single  family and  multi-unit
residential  properties  acquired  through  foreclosure.  At March 31, 2000, the
largest  property  in  non-performing  assets  was a  multi-family  unit with an
approximate value of $457,000.  Based on current market values of the collateral
securing these loans,  management anticipates no significant losses in excess of
the reserves for losses  previously  recorded.  Due to an uncertain  real estate
market and the economy in general no  assurances  can be given that our level of
non-performing assets may not increase in the future.

     We maintain an allowance for loan losses to provide for estimated potential
losses in our loan  portfolio.  We determine the level of reserves based on loan
performance,  the value of the collateral,  economic and market conditions,  and
previous experience. We review the adequacy of the allowance at least quarterly,
utilizing  its internal  loan  classifications  system.  During  fiscal 2000, we
decreased our allowance for loan losses  $98,000 to $1,218,000  due primarily to
the charge-off of specific  allowances.  Management  believes that the loan loss
reserve is  adequate.  We have had net  charge-offs  to our  allowance  for loan
losses of $381,000,  $161,000, and $421,000, for the years ended March 31, 2000,
1999 and 1998,  respectively.  The increase in net charge-offs from 1999 to 2000
is  related  primarily  to  increased  foreclosures  in  fiscal  2000.  Although
management believes it uses the best information  available,  future adjustments
to reserves may be necessary.

FINANCIAL CONDITION
--------------------------------------------------------------------------------

     Total assets increased by $42.3 million to $243.1 million at March 31, 2000
as a result of  increases in both  investment  securities  of $21.1  million and
loans of $18.3 million. The increase in both loans and investment securities was
funded by increases  in both  borrowings  of $38.0  million and deposits of $5.6
million.  The increase in deposits can be attributed primarily to an increase in
time deposits of $4.9 million. Management believes the increase in time deposits
is primarily  attributable  to maintaining  competitive  rates.  The increase in
loans  receivable  was due  primarily  to more  competitive  pricing on consumer
loans.

     Stockholders'  equity decreased $990,000 to $25.4 million at March 31, 2000
compared  to March 31,  1999.  The  decrease  was the result of a decline in net
unrealized gains of $879,000 on available for sale securities, dividends paid to
stockholders  of $819,000 and common stock  repurchased  of $615,000,  offset by
$1.3 million of net income in fiscal 2000.

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, 2000 AND 1999

     GENERAL.  Net income for the year ended  March 31, 2000 was  $1,324,000  or
$.52 diluted  earnings per share compared to $1,848,000 or $.71 diluted earnings
per share for the year ended March 31, 1999. Net income  decreased due primarily
to a  decrease  in the gain on the sale of  available  for  sale  securities  of
$624,000 and an increase in noninterest expenses during the year ended March 31,
2000.

     Our  return on  average  assets  was .60% for the  fiscal  year  ended 2000
compared to .96% for the fiscal year ended  1999.  Return on average  equity was
5.11% for fiscal  year ended 2000  compared  to 7.12% for the fiscal  year ended
1999. Average equity to average assets was 11.66% for the fiscal year ended 2000
compared  to 13.52%  for the  fiscal  year  ended  1999.  We paid  dividends  to

                                                                              13
<PAGE>


COMMUNITY FINANCIAL CORPORATION


stockholders   of  $819,000   during  2000  and  $796,000   during  fiscal  1999
representing a dividend payout ratio of 61.90% and 43.11%, respectively.

     INTEREST  INCOME.  Total interest  income  increased to $16,154,000 for the
year ended March 31, 2000 as  compared to  $14,258,000  for the year ended March
31, 1999. The increase in total interest income can be attributed to an increase
in the average dollar volume of interest-earning assets, primarily $13.8 million
in investment securities and $15.9 million in loans receivable, which was offset
by a decrease in the average yield on interest earning assets. Average yields on
total  interest-earning  assets decreased from 8.09% in fiscal 1999 to 7.84% for
the  current  fiscal year due  primarily  to a more  competitive  and lower rate
environment.

     INTEREST  EXPENSE.  Total interest expense  increased to $8,716,000 for the
year ended March 31,  2000 from  $7,332,000  for the year ended March 31,  1999.
While the cost of funds  decreased  from 4.64% for the year ended March 31, 1999
to 4.54% for the current year, the increase in interest  expense is attributable
to increases in both the average  balance of borrowings and deposits  during the
fiscal year.  The increase in deposit  balances was due primarily to an increase
in certificates of deposit for the current fiscal year.

     PROVISION  FOR LOAN  LOSSES.  The  provision  decreased to $283,000 for the
fiscal  ended March 31, 2000 from  $360,000  for the fiscal year ended March 31,
1999 due  primarily to a decrease in  non-performing  assets for fiscal 2000. We
monitor  our loan loss  reserve on a  quarterly  basis and make  allocations  as
necessary.  Management  believes  that the  level of our loan  loss  reserve  is
adequate.  As of March 31, 2000, the total allowance for loan losses amounted to
$1,218,000.  At March 31, 2000,  out total  allowance  as a percentage  of total
loans receivable was .64% and as a percentage of total  non-performing loans was
96%.

     NONINTEREST  INCOME.  Noninterest  income increased to $3,196,000 in fiscal
2000 as compared to $2,638,000 for the year ended March 31, 1999,  primarily due
to increased  fees and gains on sale of secondary  mortgage  loans in the Bank's
mortgage subsidiary, offset by a decrease in gain on sale of securities.

     NONINTEREST EXPENSE.  Total noninterest expense increased to $8,258,000 for
the year ended  March 31, 2000 from  $6,028,000  for the year March 31, 1999 due
primarily to  compensation  and other overhead  related to the mortgage  banking
subsidiary's first full year of operation,  a contract  settlement with a former
Bank president and the opening of an additional branch in Staunton,  Virginia in
October 1999.

     TAXES.  Total taxes  decreased to $770,000  during the year ended March 31,
2000 from  $1,328,000  during  fiscal 1999.  The effective tax rate for the year
ended March 31, 2000 was 36.8% as compared to 41.8% for the year ended March 31,
1999.  The decrease in taxes is  attributable  primarily to a decrease in income
before  income  taxes,  a decrease in the  effective  state  income tax rate and
purchases of investments with reduced effective income tax rates.

COMPARISON OF YEARS ENDED
MARCH 31, 1999 AND 1998

     GENERAL.  Net income for the year ended  March 31, 1999 was  $1,848,000  or
$.71 diluted  earnings per share compared to $1,805,000 or $.70 diluted earnings
per share for the year ended March 31, 1998. Net income  increased due primarily
to an after tax gain on the sale of available  for sale  securities  of $725,000
during the year ended March 31, 1999.


     Our  return on  average  assets  was .96% for the  fiscal  year  ended 1999
compared to 1.03% for the fiscal year ended 1998.  Return on average  equity was
7.12% for fiscal year ended 1999 compared to 7.39% for fiscal year 1998. Average
equity to average  assets was 13.52% for the fiscal year ended 1999  compared to
13.89% for the fiscal year ended 1998.  We paid  dividends  to  stockholders  of
$796,000  during 1999 and $715,000  during fiscal 1998  representing  a dividend
payout ratio of 43.11% and 39.60% respectively.

     INTEREST  INCOME.  Total interest  income  increased to $14,258,000 for the
year ended March 31, 1999 as  compared to  $13,949,000  for the year ended March
31, 1998. The increase in total interest income can be attributed to an increase
in the dollar  volume of  interest-earning  assets,  primarily  $8.9  million in
mortgage  and  consumer  loans  which was offset by a  decrease  in the yield on

14
<PAGE>


                                                 COMMUNITY FINANCIAL CORPORATION


interest  earning  assets.  Average  yields  on  total  interest-earning  assets
decreased  from 8.22% in fiscal 1998 to 8.09% for fiscal 1999 due primarily to a
more competitive and lower rate environment.

        INTEREST EXPENSE. Total interest expense increased to $7,333,000 for the
year ended March 31,  1999 from  $7,316,000  for the year ended March 31,  1998.
While the cost of funds  decreased  from 4.80% for the year ended March 31, 1998
to 4.64% for fiscal 1999, the increase in interest expense is attributable to an
increase in the average  balance of deposits during fiscal 1999. The increase in
deposit  balances  was due to  increases  in both  certificates  of deposit  and
checking  accounts for fiscal 1999. The increase in interest  expense related to
deposits was partially  offset by the lower average balance of Federal Home Loan
Bank advances during fiscal 1999.

    PROVISION  FOR LOAN  LOSSES.  The  provision  decreased  to $360,000 for the
fiscal year ended March 31, 1999 from  $499,000  for the fiscal year ended March
31, 1998 due primarily to a decrease in charge-offs  for fiscal 1999. We monitor
our loan loss reserve on a quarterly  basis and make  allocations  as necessary.
Management  believes that the level of our loan loss reserve is adequate.  As of
March 31, 1999, the total allowance for loan losses  amounted to $1,316,000.  At
March 31, 1999,  our total  allowance as a percentage of total loans  receivable
was .77% and as a percentage of total non-performing loans was 113%.

     NONINTEREST  INCOME.  Noninterest  income increased to $2,638,000 in fiscal
1999 as compared to $767,000 for the year ended March 31, 1998, primarily due to
the gain on the sale of securities of $1,225,000.

     NONINTEREST EXPENSE.  Total noninterest expense increased to $6,028,000 for
the year ended March 31, 1999 from  $4,017,000 for the year ended March 31, 1998
due primarily to compensation and other overhead related to the mortgage banking
subsidiary,  the  conversion  of our  computer  system  and  the  opening  of an
additional branch in the Hampton Roads region in November 1998.

     TAXES.  Total taxes increased to $1,328,000 during the year ended March 31,
1999 from  $1,079,000  during  fiscal 1998.  The effective tax rate for the year
ended March 31, 1999 was 41.8% as compared to 37.4% for the year ended March 31,
1998.  The  increase  in taxes is  attributable  in part to an  increase  in the
effective state income taxes.

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. Savings associations are required to
maintain  minimum  levels  of  liquid  assets.   Office  of  Thrift  Supervision
regulations  currently require us to maintain an average daily balance of liquid
assets equal to at least 4% of the sum of Community Bank's average daily balance
of net withdrawable deposit accounts and borrowings payable in one year or less.
At March 31, 2000, our liquid asset ratio was 6.8%.

     Our dominant  source of funds during the year ended March 31, 2000 was from
borrowings which increased by $38.0 million

     Our cash  decreased  $2.7 million  from $10.1  million at March 31, 1999 to
$7.4 million at March 31, 2000. The decrease in cash was related to the increase
in securities and loans receivable.

     At March 31,  2000,  we had  commitments  to  purchase or  originate  $12.8
million of loans.  Certificates  of deposit  scheduled  to mature in one year or
less  at  March  31,  2000,  totaled  $63.0  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

                                                                              15
<PAGE>


COMMUNITY FINANCIAL CORPORATION


sources of funds will be adequate to meet our  foreseeable  short- and long-term
liquidity needs.

     At March 31,  2000,  we had  tangible and core capital of 9.75% 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 15.9% of risk weighted  assets,  which
also exceeded its requirement of 8.0%.

IMPACT OF INFLATION
AND CHANGING PRICES
--------------------------------------------------------------------------------

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

ACCOUNTING
PRONOUNCEMENTS
--------------------------------------------------------------------------------

     For a discussion of certain  accounting  pronouncements  implemented  by us
during  fiscal  2000 and new  pronouncements  which will be  implemented  in the
future, see Summary of Accounting Policies to Consolidated Financial Statements.

16
<PAGE>


COMMUNITY FINANCIAL CORPORATION




BDO                 BDO Seidman, LLP              300 Arboretum Place, Suite 520
                    Accountants and Consultants   Richmond, Virginia 23236
                                                  Telephone: (804)330-3092
                                                  Fax: (804)330-7753


Report of Independent Certified Public Accountants


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

     We have audited the accompanying  consolidated  balance sheets of Community
Financial  Corporation  and  subsidiary  as of March 31, 2000 and 1999,  and the
related consolidated  statements of income,  stockholders' equity and cash flows
for each of the three years in the period ended March 31, 2000.  These financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

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

     In our opinion,  the consolidated  financial  statements  referred to above
present fairly, in all material  respects,  the financial  position of Community
Financial Corporation and subsidiary at March 31, 2000 and 1999, and the results
of their  operations  and their  cash  flows for each of the three  years in the
period ended March 31, 2000 in conformity  with  generally  accepted  accounting
procedures.


     Richmond, Virginia
     April 28, 2000


                                   /s/ BDO Seidman, LLP



                                                                              17
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY

<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS

March 31,                                                       2000            1999
----------------------------------------------------------------------------------------
<S>                                                        <C>              <C>
ASSETS
Cash (including interest bearing deposits of
    approximately $1,908,000 and $6,407,000)               $  7,424,577     $ 10,131,157
Securities (Note 1)
    Held to maturity                                         27,312,943        5,561,314
    Available for sale                                        6,863,674        3,543,092
Investment in Federal Home Loan Bank stock,
    at cost (Note 6)                                          1,950,000        1,508,200
Loans receivable, net (Notes 2 and 6)                       189,700,859      171,413,721
Real estate owned, net                                          823,002          351,733
Property and equipment, net (Note 3)                          6,627,869        6,050,785
Accrued interest receivable                                   1,288,112        1,164,745
Prepaid expenses and other assets                             1,086,330        1,085,272
----------------------------------------------------------------------------------------
                                                           $243,077,366     $200,810,019
----------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY

LIABILITIES
Deposits (Note 4)                                          $158,568,275     $153,015,076
Advances from Federal Home Loan Bank (Note 6)                37,000,000       19,000,000
Securities sold under agreement to repurchase (Note 7)       20,000,000               --
Advance payments by borrowers
    for taxes and insurance                                     226,195          190,421
Other liabilities (Notes 8 and 12)                            1,888,821        2,220,794
----------------------------------------------------------------------------------------
Total liabilities                                           217,683,291      174,426,291
----------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 12, 13, and 14)
----------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY (Notes 10 and 13)
Preferred stock, $.01 par value, authorized
    3,000,000 shares, none outstanding                               --               --
Common stock, $.01 par value, 10,000,000 authorized
    shares, 2,511,526 and 2,572,146 shares outstanding           25,115           25,721
Additional paid-in capital                                    4,782,029        4,897,207
Retained earnings                                            19,401,019       19,395,509
Accumulated other comprehensive income (Note 9)               1,185,912        2,065,291
----------------------------------------------------------------------------------------
Total stockholders' equity                                   25,394,075       26,383,728
----------------------------------------------------------------------------------------
                                                           $243,077,366     $200,810,019
----------------------------------------------------------------------------------------
</TABLE>

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

18
<PAGE>


<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME

Year Ended March 31,                             2000              1999             1998
-------------------------------------------------------------------------------------------
<S>                                         <C>               <C>              <C>
INTEREST INCOME
Loans                                       $ 14,565,894      $ 13,665,754     $ 13,344,490
Investment securities                          1,448,006           348,965          410,909
Other investments                                140,048           243,468          193,908
-------------------------------------------------------------------------------------------
Total interest income                         16,153,948        14,258,187       13,949,307
-------------------------------------------------------------------------------------------
INTEREST EXPENSE
Deposits (Note 4)                              6,380,089         6,387,333        5,844,535
Borrowed money                                 2,335,487           945,198        1,471,490
-------------------------------------------------------------------------------------------
Total interest expense                         8,715,576         7,332,531        7,316,025
-------------------------------------------------------------------------------------------
NET INTEREST INCOME                            7,438,372         6,925,656        6,633,282
PROVISION FOR LOAN LOSSES (NOTE 2)               282,854           360,000          498,764
-------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR
    LOAN LOSSES                                7,155,518         6,565,656        6,134,518
-------------------------------------------------------------------------------------------
NONINTEREST INCOME
Service charges, fees and commissions          1,366,212         1,327,680          757,462
Gain on sale of securities                       601,412         1,224,721               --
Gain (loss) on sale of loans                   1,015,447            81,730           (4,335)
Other                                            213,400             3,449           13,463
-------------------------------------------------------------------------------------------
Total noninterest income                       3,196,471         2,637,580          766,590
-------------------------------------------------------------------------------------------
NONINTEREST EXPENSE
Compensation and employee benefits
    (Note 12)                                  4,844,745         3,306,117        1,956,187
Occupancy                                      1,241,315           826,089          481,063
Data processing                                  132,051           486,775          407,925
Insurance                                         72,530            82,317           74,222
Other                                          1,967,601         1,326,435        1,097,558
-------------------------------------------------------------------------------------------
Total noninterest expense                      8,258,242         6,027,733        4,016,955
-------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES                     2,093,747         3,175,503        2,884,153
-------------------------------------------------------------------------------------------
Income taxes (Note 8)
  Current                                        920,799         1,175,168        1,013,576
  Deferred                                      (150,932)          152,789           65,094
-------------------------------------------------------------------------------------------
Total income taxes                               769,867         1,327,957        1,078,670
-------------------------------------------------------------------------------------------
NET INCOME                                  $  1,323,880      $  1,847,546     $  1,805,483
-------------------------------------------------------------------------------------------
EARNINGS PER SHARE (NOTES 11 AND 13)
  Basic                                     $        .52      $        .72     $        .71
  Diluted                                   $        .52      $        .71     $        .70

</TABLE>

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


                                                                              19
<PAGE>



<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                                                                                               Accumulated
                                                            Additional                            Other             Total
                                            Common           Paid-in            Retained      Comprehensive     Stockholders'
                                            Stock            Capital            Earnings          Income           Equity
-----------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>               <C>               <C>               <C>               <C>
BALANCE, MARCH 31, 1997                 $     12,753      $  4,716,677      $ 17,266,745      $  1,340,821      $ 23,336,996
Comprehensive income
  Net income                                      --                --         1,805,483                --         1,805,483
  Unrealized gain on available
     for sale securities (Note 9)                 --                --                --         1,030,338         1,030,338
                                                                                                                ------------
Total comprehensive income                        --                --                --                --         2,835,821
                                                                                                                ------------
Two-for-one stock split                       12,797                --           (12,797)               --                --
Cash dividends, $.28 per share                    --                --          (715,058)               --          (715,058)
Exercise of stock options (Note 13)               44            56,957                --                --            57,001
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1998                       25,594         4,773,634        18,344,373         2,371,159        25,514,760
Comprehensive income
  Net income                                      --                --         1,847,546                --         1,847,546
  Change in unrealized gain on
     available for sale securities
     (Note 9)                                     --                --                --          (305,868)         (305,868)
                                                                                                                ------------
Total comprehensive income                        --                --                --                --         1,541,678
                                                                                                                ------------
Cash dividends, $.31 per share                    --                --          (796,410)               --          (796,410)
Exercise of stock options (Note 13)              127           123,573                --                --           123,700
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 1999                       25,721         4,897,207        19,395,509         2,065,291        26,383,728
Comprehensive income
  Net income                                      --                --         1,323,880                --         1,323,880
  Change in unrealized gain on
     available for sale securities
     (Note 9)                                     --                --                --          (879,379)         (879,379)
                                                                                                                ------------
Total comprehensive income                        --                --                --                --           444,501
                                                                                                                ------------
Cash dividends, $.32 per share                    --                --          (819,493)               --          (819,493)
Repurchase of stock
    (60,620 shares) (Note 11)                   (606)         (115,178)         (498,877)               --          (614,661)
-----------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2000                 $     25,115      $  4,782,029      $ 19,401,019      $  1,185,912      $ 25,394,075
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS

Year Ended March 31,                                          2000              1999              1998
----------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S>                                                      <C>               <C>               <C>
Net income                                               $  1,323,880      $  1,847,546      $  1,805,483
Adjustments to reconcile net income to
net cash provided by operating activities
        Provision for loan losses                             282,854           360,000           498,764
        Depreciation                                          715,219           394,438           234,007
        Amortization of premium and accretion
                of discount on securities, net                  3,662             5,238              (586)
        Increase (decrease) in net deferred loan
                origination fees                              (81,228)           21,510          (115,671)
        Loans originated for resale                       (59,081,330)      (19,528,255)       (4,805,000)
        Proceeds from loan sales                           59,083,634        19,130,400         3,816,000

</TABLE>

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

20
<PAGE>


                                  COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY
<TABLE>
<CAPTION>

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<S>                                                      <C>               <C>               <C>
        Increase in deferred income taxes                $   (401,119)     $    (46,012)     $    (24,394)
        Loss (gain) on sale of real estate                         --                --            (9,755)
        Gain on sale of securities                           (601,412)       (1,224,721)               --
        (Increase) decrease in other assets                  (124,425)         (720,091)         (206,452)
        Increase (decrease) in other liabilities              104,920           241,986           464,334
----------------------------------------------------------------------------------------------------------
Net cash provided by operating activities                   1,224,655           482,039         1,656,730
----------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from maturities of held to maturity
    securities                                              6,237,420         1,829,429         3,742,267
Purchase of held to maturity securities (27,260,915)       (4,175,685)       (2,359,982)
Proceeds from sale of securities                              612,189         1,244,761                --
Purchase of available for sale securities                  (4,942,534)               --                --
Net increase in loans                                     (19,522,241)       (9,282,876)      (13,232,234)
Purchases of property and equipment                        (1,292,303)       (2,811,000)         (326,123)
Proceeds from sale of real estate owned                       559,904           308,351           152,043
Redemption of FHLB stock                                    1,350,000            91,800                --
Purchase of FHLB stock                                     (1,791,800)               --          (200,000)
----------------------------------------------------------------------------------------------------------
Net cash absorbed by investing activities                 (46,050,280)      (12,795,220)      (12,224,029)
----------------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
Net increase in certificates of
    deposit                                                 4,793,639         4,887,457        17,787,000
Net increase in savings and
    checking deposits                                         759,560         9,963,446         3,782,288
Proceeds from issuance of common stock                             --           123,700            57,001
Repurchase of stock                                          (614,661)               --                --
Increase in securities sold under agreements
  to repurchase                                            20,000,000                --                --
Dividends paid                                               (819,493)         (796,410)         (715,058)
Proceeds from advances                                     85,000,000         8,000,000        76,000,000
Repayments of advances                                    (67,000,000)       (7,000,000)      (84,000,000)
----------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                  42,119,045        15,178,193        12,911,231
----------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                                            (2,706,580)        2,865,012         2,343,932

CASH AND CASH EQUIVALENTS - beginning of year              10,131,157         7,266,145         4,922,213
----------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS - end of year                  $  7,424,577      $ 10,131,157      $  7,266,145
==========================================================================================================
SUPPLEMENTAL DISCLOSURES OF CASH
    FLOW INFORMATION
Cash payments of interest expense                        $  8,722,056      $  7,363,055      $  7,340,052
----------------------------------------------------------------------------------------------------------
Cash payments of income taxes                            $    967,226      $  1,413,415      $  1,207,076
==========================================================================================================
SUPPLEMENTAL SCHEDULE OF NON-CASH
    INVESTING AND FINANCING ACTIVITIES
----------------------------------------------------------------------------------------------------------
Transfers from loans to real estate
  acquired through  foreclosure                          $  1,031,173      $    412,862      $    331,237
----------------------------------------------------------------------------------------------------------
</TABLE>

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

                                                                              21
<PAGE>


SUMMARY OF ACCOUNTING POLICIES

PRINCIPLES OF
CONSOLIDATION
--------------------------------------------------------------------------------

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

NATURE OF BUSINESS
AND REGULATORY
ENVIRONMENT
--------------------------------------------------------------------------------

     The Bank is a  federally  chartered  thrift  and the  primary  asset of the
Corporation.  The  Corporation  provides  a full range of  banking  services  to
individual  and  corporate   customers  through  its  wholly-owned   subsidiary.
Community  First  Mortgage  Corporation  originates  mortgage  loans  to sell to
third-party investors.

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

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

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

ESTIMATES
--------------------------------------------------------------------------------

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

SECURITIES
--------------------------------------------------------------------------------

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

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


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

LOANS RECEIVABLE
--------------------------------------------------------------------------------

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

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

     The Corporation  places loans on nonaccrual  status after being  delinquent
greater  than 90 days or  earlier  if the  Corporation  becomes  aware  that the
borrower has entered bankruptcy proceedings, or in situations in which the loans
have developed inherent problems prior to being 90 days delinquent that indicate

22
<PAGE>


                                  COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY


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.

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

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

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

REAL ESTATE OWNED

     Real estate acquired through foreclosure is initially recorded at the lower
of fair value, less selling costs, or the balance of the loan on the property at
date of  foreclosure.  Costs  relating to the  development  and  improvement  of
property are  capitalized,  whereas  those  relating to holding the property are
charged to expense.  Valuations are periodically performed by management, and an
allowance  for losses is  established  by a charge to operations if the carrying
value of a property exceeds its estimated fair value.

SALE OF LOANS AND
PARTICIPATION IN LOANS
--------------------------------------------------------------------------------

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

     The  Corporation  allocates  the cost of acquiring or  originating  morgage
loans  between  the  morgage  servicing  rights  and the  loans,  based on their
relative fair values, if the bank sells or securitizes the loans and retains the
mortgage servicing rights.

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

PROPERTY AND EQUIPMENT
--------------------------------------------------------------------------------

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

INCOME TAXES
--------------------------------------------------------------------------------

     Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted  statutory tax rates applicable to future years

                                                                              23
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY


to  differences  between the financial  statement  carrying  amounts and the tax
bases of existing assets and liabilities.

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

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

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

NEW ACCOUNTING
PRONOUNCEMENTS
--------------------------------------------------------------------------------

     In June 1998, the Financial  Accounting Standards Board issued Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and Hedging Activities ("SFAS 133"), which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts, and for hedging activities.  SFAS 133 requires that
an entity  recognized  all  derivatives  as either assets or  liabilities in the
statement of financial  position and measure those instruments at fair value. If
certain  requirements are met, a derivative may be specifically  designated as a
hedge and an entity  that  elects  to apply  hedge  accounting  is  required  to
establish at the inception of the hedge the method it will use for assessing the
effectiveness  of the  hedging  derivative  and  the  measurement  approach  for
determining  the  ineffective  aspect  of  the  hedge.  Those  methods  must  be
consistent  with the entity's  approach to managing risk.  SFAS 133 is effective
for all fiscal  quarters  of fiscal  years  beginning  after  June 15,  2000 and
requires application prospectively.

EARNINGS PER SHARE
--------------------------------------------------------------------------------

     Basic  earnings  per share  include no dilution and is computed by dividing
income available to common shareholders by the weighted average number of common
shares  outstanding  for the period.  Diluted  earnings  per share  reflects the
potential  dilution of stock  options  that could  share in the  earnings of the
Corporation.  The  computation  of  basic  and  diluted  earnings  per  share is
presented in Note 11.

COMPREHENSIVE INCOME
--------------------------------------------------------------------------------

     For the year ended March 31, 1999,  the  Corporation  adopted  Statement of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income" (SFAS
130). This statement establishes rules for the reporting of comprehensive income
and its components.  Comprehensive  income consists of net income and unrealized
gains on available  for sale  securities  and is  presented in the  Consolidated
Statements of  Stockholders'  Equity.  The adoption of SFAS 130 had no impact on
total  shareholders'   equity.   Prior  year  financial   statements  have  been
reclassified to conform to SFAS 130 requirements.

STATEMENT OF CASH FLOWS
--------------------------------------------------------------------------------

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

OTHER
--------------------------------------------------------------------------------

     Certain  reclassifications  have been made in the prior years' consolidated
financial statements to conform to the March 31, 2000 presentation.

24
<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


1. SECURITIES

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

<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------------------------------------------------
                                                    Gross         Gross        Estimated
                                  Amortized       Unrealized    Unrealized       Market
                                     Cost           Gains         Losses         Value
------------------------------------------------------------------------------------------
<S>                              <C>            <C>            <C>            <C>
Held to Maturity
  United States government
      and agency obligations     $23,064,860    $       --     $  454,881     $22,609,979
  Corporate securities              249,607             --          8,669        240,938
  Other                           3,998,476             50         45,873      3,952,653
------------------------------------------------------------------------------------------
                                 27,312,943             50        509,423     26,803,570

Available for Sale
  Federal Home Loan Mortgage
      Corporation securities      4,950,913      2,195,846        283,085      6,863,674
------------------------------------------------------------------------------------------
                                 $32,263,856    $2,195,896     $  792,508     $33,667,244
------------------------------------------------------------------------------------------


March 31, 1999
------------------------------------------------------------------------------------------
                                                    Gross         Gross        Estimated
                                  Amortized       Unrealized    Unrealized       Market
                                     Cost           Gains         Losses         Value
------------------------------------------------------------------------------------------
Held to Maturity
  United States government
      and agency obligations     $2,314,606     $    1,952     $   15,630     $2,300,928
  Corporate obligations             250,000             --          2,500        247,500
  Other                           2,996,708         34,893          2,183      3,029,418
------------------------------------------------------------------------------------------
                                  5,561,314         36,845         20,313      5,577,846

Available for Sale
  Federal Home Loan Mortgage
      Corporation stock              60,565      3,482,527             --      3,543,092
------------------------------------------------------------------------------------------
                                 $5,621,879     $3,519,372     $   20,313     $9,120,938
------------------------------------------------------------------------------------------
</TABLE>

The amortized  cost and estimated  market value of securities at March 31, 2000,
by contractual maturity, are shown below:

<TABLE>
<CAPTION>
March 31, 2000
------------------------------------------------------------------------------------------
                                                                               Estimated
                                                               Amortized         Market
                                                                 Cost            Value
------------------------------------------------------------------------------------------
<S>                                                          <C>              <C>
Held to Maturity
Due in one year or less                                      $  1,194,740     $1,193,029
   Due in one through five years                               26,118,203     25,610,541
------------------------------------------------------------------------------------------
                                                               27,312,943     26,803,570
------------------------------------------------------------------------------------------
Available for Sale
  Federal Home Loan Mortgage
      Corporation securities                                    4,950,913      6,863,674
------------------------------------------------------------------------------------------
                                                              $32,263,856    $33,667,244
------------------------------------------------------------------------------------------
</TABLE>

                                                                              25
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY


2. LOANS RECEIVABLE

Loans receivable are summarized as follows:
MARCH 31,                                          2000                 1999
--------------------------------------------------------------------------------
Residential real estate                        $117,600,980         $102,567,603
Commercial real estate                           22,126,570           26,934,359
Construction and land                            20,686,821           14,244,817
Commercial business                               9,391,517            7,635,017
Consumer                                         30,752,825           25,865,898
--------------------------------------------------------------------------------
                                                200,558,713          177,247,694
Less
  Loans in process                                9,542,080            4,249,251
  Deferred loan fees, net                           187,606              268,834
  Allowance for loan losses                       1,218,168            1,315,888
--------------------------------------------------------------------------------
                                               $ 10,857,854         $  5,833,973
--------------------------------------------------------------------------------
                                               $189,700,859         $171,413,721
================================================================================

Loans serviced for others amounted to approximately $5,584,000 and $6,919,000 at
March  31,  2000 and 1999,  respectively.  The loans  were not  included  in the
accompanying consolidated balance sheets.

The weighted average interest rate on loans receivable was  approximately  8.36%
and 8.02% at March 31, 2000 and 1999, respectively.

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

Year Ended March 31,                     2000             1999           1998
--------------------------------------------------------------------------------
Balance at beginning of year        $ 1,315,888     $ 1,117,131     $ 1,039,013
Provision charged to expense            282,854         360,000         498,764
Losses charged to the allowance,
    net of recoveries                  (380,574)       (161,243)       (420,646)
--------------------------------------------------------------------------------
Balance at end of year              $ 1,218,168     $ 1,315,888     $ 1,117,131
--------------------------------------------------------------------------------

Of the total allowance for loan losses at March 31, 2000 and 1999, approximately
$1,195,000 is not specifically allocated to identified problem loans.

3. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

MARCH 31,                                                 2000           1999
--------------------------------------------------------------------------------
Buildings                                              $4,149,949     $3,379,926
Land and improvements                                   2,158,849      2,138,883
Furniture and equipment 2,672,606                       2,218,362
Construction in progress                                    6,956        185,050
--------------------------------------------------------------------------------
                                                        8,988,360      7,922,221
Less accumulated depreciation and amortization          2,360,491      1,871,436
--------------------------------------------------------------------------------
Net office properties and equipment                    $6,627,869     $6,050,785
--------------------------------------------------------------------------------


26


<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

4. DEPOSITS

MARCH 31,                                               2000             1999
--------------------------------------------------------------------------------
DEMAND DEPOSITS
  Savings accounts                                 $ 14,574,084     $ 14,306,876
  NOW accounts                                       26,762,722       25,914,356
  Money market deposit accounts 11,257,373           11,613,387
--------------------------------------------------------------------------------
Total demand deposits                                52,594,179       51,834,619

TIME DEPOSITS                                       105,974,096      101,180,457
--------------------------------------------------------------------------------
                                                   $158,568,275     $153,015,076
--------------------------------------------------------------------------------

The aggregate  amount of time deposit  accounts with a minimum  denomination  of
$100,000 was  approximately  $15,301,000  and  $19,478,000 at March 31, 2000 and
1999, respectively.

Time deposits mature as follows:

MARCH 31,                                          2000                  1999
--------------------------------------------------------------------------------
Within one year                               $ 63,034,279          $ 78,346,261
One to two years                                34,437,972            10,164,229
More than two years                              8,501,845            12,669,967
--------------------------------------------------------------------------------
                                              $105,974,096          $101,180,457
--------------------------------------------------------------------------------

Interest expense on deposits is summarized as follows:

YEAR ENDED MARCH 31,                          2000          1999          1998
--------------------------------------------------------------------------------
Time deposits                             $5,143,629    $5,202,693    $4,773,241
Money market deposit and NOW accounts        795,965       782,097       701,547
Savings                                      440,495       402,543       369,747
--------------------------------------------------------------------------------
                                          $6,380,089    $6,387,333    $5,844,535
--------------------------------------------------------------------------------

5. FAIR VALUE OF FINANCIAL INSTRUMENTS

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

<TABLE>
<CAPTION>
MARCH 31,                                          2000                             1999
--------------------------------------------------------------------------------------------------
                                         Carrying         Fair           Carrying          Fair
                                          Amount          Value           Amount           Value
--------------------------------------------------------------------------------------------------
<S>                                   <C>             <C>             <C>             <C>
FINANCIAL ASSETS
  Cash and short-term investments     $  7,424,577    $  7,425,000    $ 10,131,157    $ 10,131,000
  Securities                            34,176,617      33,667,000       9,104,406       9,121,000
  Loans, net of allowance for
   loan losses                         189,700,859     188,677,000     171,413,721     173,844,000
FINANCIAL LIABILITIES
  Deposits                             158,568,275     159,181,000     153,015,076     153,402,000
  Advances from Federal Home
   Loan Bank                            37,000,000      37,000,000      19,000,000      19,000,000
  Securities sold under agreements
   to repurchase                        20,000,000      20,000,000              --              --
</TABLE>

                                                                              27
<PAGE>




5. Fair Value of Financial Instruments (continued)
<TABLE>
<CAPTION>
                                        Notional         Fair          Notional        Fair
                                         Amount          Value          Amount         Value
----------------------------------------------------------------------------------------------
<S>                                   <C>            <C>            <C>            <C>
Unrecognized financial instruments
  Commitments to extend credit        $16,197,000    $16,197,000    $32,807,000    $32,807,000
</TABLE>

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

Cash and short-term investments
-------------------------------

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

Securities
----------

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

Loan receivables
----------------

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

Deposit liabilities
-------------------

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

Advances from Federal Home Loan Bank
------------------------------------

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

Securities sold under agreements to repurchase
----------------------------------------------

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

Commitments to extend credit
----------------------------

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

28
<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6.  ADVANCES FROM FEDERAL HOME LOAN BANK

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

        Due in year ending March 31,
        ----------------------------
        2001             $37,000,000
        ----------------------------
                         $37,000,000
        ============================

The weighted  average interest rate on advances was 6.59% and 5.60% at March 31,
2000 and 1999, respectively. These advances are collateralized by the investment
in FHLB stock and the  Corporation's  portfolio of first  mortgage loans under a
Blanket Floating Lien Agreement.

Information  related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,                             2000           1999           1998
---------------------------------------------------------------------------------------
<S>                                          <C>            <C>            <C>
Maximum amount outstanding during the year   $42,000,000    $20,000,000    $32,000,000
---------------------------------------------------------------------------------------
Average amount outstanding during the year   $32,583,333    $14,166,667    $25,916,667
---------------------------------------------------------------------------------------
Average interest rate during the year               5.68%          5.72%          5.68%
---------------------------------------------------------------------------------------
</TABLE>

7. SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE

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

Year Ended March 31,                                    2000           1999
--------------------------------------------------------------------------------
Balance at end of year                              $20,000,000     $      --
--------------------------------------------------------------------------------
Weighted average interest rate during the year             5.74%           --
--------------------------------------------------------------------------------
Average amount outstanding during the year          $10,000,000     $      --
--------------------------------------------------------------------------------
Maximum amount outstanding at any month end
  during the year                                   $20,000,000     $      --
--------------------------------------------------------------------------------

8. INCOME TAXES

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

March 31,                                       2000               1999
--------------------------------------------------------------------------------
Deferred tax assets
  Allowance for losses                       $141,951           $ 98,855
  Other                                         4,954             11,684
--------------------------------------------------------------------------------
                                             $146,905           $110,539
--------------------------------------------------------------------------------

                                                                              29
<PAGE>



COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY


8. INCOME TAXES (CONTINUED)

DEFERRED TAX LIABILITIES
  Depreciable assets                     $  (139,142)        $  (204,388)
  FHLMC stock                               (726,849)         (1,417,236)
  FHLB stock                                 (36,320)            (85,640)
--------------------------------------------------------------------------------
                                            (902,311)         (1,707,264)
--------------------------------------------------------------------------------
Net deferred tax liability               $  (755,406)        $(1,596,725)
--------------------------------------------------------------------------------

9. COMPREHENSIVE INCOME

The  components  of the other  comprehensive  income  (loss) are  summarized  as
follows:
<TABLE>
<CAPTION>
Year Ended March 31,                                   2000           1999          1998
-------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>
Unrealized gains (losses) on securities:
  Unrealized holding gain arising during
        the period                               $  (889,052)   $   706,301    $ 1,661,835
  Less: reclassification adjustments for gains
        included in net income                       601,421      1,224,721             --
-------------------------------------------------------------------------------------------
Other comprehensive income (loss), before tax     (1,490,473)      (518,420)     1,661,835

Income tax (expense) benefit related to
  items of other comprehensive income                611,094        212,552       (631,497)
-------------------------------------------------------------------------------------------
Other comprehensive income (loss), net of tax    $  (879,379)   $  (305,868)   $ 1,030,338
-------------------------------------------------------------------------------------------
</TABLE>

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 presents the Bank's regulatory  capital levels,  relative to
the OTS requirements applicable at that date:

                        Amount     Percent    Actual    Actual        Excess
MARCH 31, 2000         Required    Required   Amount    Percent       Amount
--------------------------------------------------------------------------------
Tangible Capital     $ 3,672,000    1.50%  $23,867,000    9.75%   $20,195,000
Core Capital           9,793,000    4.00    23,867,000    9.75     14,074,000
Risk-based Capital    13,406,000    8.00    25,923,000   15.85     12,517,000


                        Amount     Percent    Actual    Actual        Excess
March 31, 1999         Required    Required   Amount    Percent       Amount
--------------------------------------------------------------------------------
Tangible Capital     $ 3,014,000    1.50%  $23,572,000   11.70%   $20,558,000
Core Capital           8,038,000    4.00    23,572,000   11.70     15,534,000
Risk-based Capital    12,011,000    8.00    24,707,000   15.66     12,696,000

30
<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


10. STOCKHOLDERS' EQUITY AND REGULATORY CAPITAL REQUIREMENTS (CONTINUED)

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 period.  Any  distributions in excess of that amount require prior OTS
notice,  with the  opportunity for OTS to object to the  distribution.  A Tier 1
savings  bank is defined as a savings  bank that has, on a pro forma basis after
the  proposed  distribution,  capital  equal to or  greater  than the OTS  fully
phased-in capital  requirement and has not been deemed by the OTS to be "in need
of more than normal  supervision".  The Bank is currently classified as a Tier 1
institution for these purposes.  The Capital  Distribution  Regulation  requires
that savings banks provide the  applicable  OTS District  Director with a 30-day
advance  written  notice of all proposed  capital  distributions  whether or not
advance approval is required by the regulation.

11. EARNINGS PER SHARE

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

During the year ended March 31, 2000, the Board of Directors  authorized a stock
repurchase  program  under  which  up to 5%,  or  128,607  shares,  of the  then
outstanding share of the Corporation's stock may be repurchased. During the year
ended March 31, 2000,  60,620 shares were repurchased for an aggregate amount of
approximately $615,000.

Earnings per share is calculated as follows:
<TABLE>
<CAPTION>

YEAR ENDED MARCH 31,                                     2000         1999        1998
-----------------------------------------------------------------------------------------

BASIC EARNINGS
<S>                                                  <C>          <C>          <C>
Income available to common shareholders              $1,323,880   $1,847,546   $1,805,483
-----------------------------------------------------------------------------------------
Weighted average shares outstanding                   2,561,343    2,569,543    2,553,216
-----------------------------------------------------------------------------------------
Basic earnings per share                             $      .52   $      .72   $      .71
-----------------------------------------------------------------------------------------

DILUTED EARNINGS PER SHARE
Income available to common shareholders $1,323,880   $1,847,546   $1,805,483
-----------------------------------------------------------------------------------------
Weighted average shares outstanding                   2,561,343    2,569,543    2,553,216
   Diluted effect of stock options                           --       19,960       30,415
-----------------------------------------------------------------------------------------
Total weighted average shares outstanding             2,561,343    2,589,503    2,583,631
-----------------------------------------------------------------------------------------
Diluted earnings per share                           $      .52   $      .71   $      .70
-----------------------------------------------------------------------------------------
</TABLE>


                                                                              31
<PAGE>



COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY


12. EMPLOYEE BENEFIT PLANS

Pension Plan

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

<TABLE>
<CAPTION>
YEAR ENDED MARCH 31,                                   2000         1999         1998
---------------------------------------------------------------------------------------

NET PERIODIC PENSION COST
<S>                                                <C>          <C>          <C>
Service cost - benefits earned during the period   $  74,653    $  75,192    $  46,902
Interest cost on projected benefit obligations        48,874       42,780       39,573
Actual return on plan assets                         (39,563)     (38,281)     (38,146)
Net amortization and deferral                        (10,954)     (11,604)      (7,275)
---------------------------------------------------------------------------------------
                                                   $  73,010    $  68,087    $  41,054
---------------------------------------------------------------------------------------

ACCUMULATED BENEFIT OBLIGATION

Vested benefits $511,450                            $511,450    $ 471,078    $ 520,012
Non-vested benefits                                   23,503       13,755        9,945
---------------------------------------------------------------------------------------

                                                   $ 534,953    $ 484,833    $ 529,957
---------------------------------------------------------------------------------------
</TABLE>

YEAR ENDED MARCH 31,                                 2000            1999
--------------------------------------------------------------------------------
ACCRUED PENSION COST

Projected benefit obligation                     $ 700,531       $ 694,077
Fair value of plan assets, primarily
  IPG insurance contracts                          719,060         616,206
--------------------------------------------------------------------------------
Assets in excess (deficit) of projected
  benefit obligation                                18,529         (77,871)
Unrecognized prior service cost                      9,304          12,404
Unrecognized net (gain) loss                       (27,740)         62,256
Unrecognized net asset                             (33,063)        (41,330)
--------------------------------------------------------------------------------
                                                 $ (32,970)      $ (44,541)
--------------------------------------------------------------------------------


32
<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


12. EMPLOYEE BENEFIT PLANS (CONTINUED)

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

YEAR ENDED MARCH 31,                                     2000         1999
--------------------------------------------------------------------------------

Weighted average discount rate                           8.0%         6.8%
--------------------------------------------------------------------------------

Expected long-term rate of return on
  plan assets                                            7.5%         7.5%
--------------------------------------------------------------------------------

Increase in future compensation levels                   5.0%         5.0%
--------------------------------------------------------------------------------

The measurement  dates used to value the plan assets were December 31, 1999, and
1998.

EMPLOYEE STOCK OWNERSHIP PLAN

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

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

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

Profit-sharing,  pension plan, and retirement  expenses were $154,400,  $92,000,
and $50,000 for the years ended March 31, 2000, 1999, and 1998, respectively.


                                                                              33
<PAGE>



13. STOCK OPTION PLAN

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

The following table summarizes options outstanding:
<TABLE>
<CAPTION>

YEAR ENDING MARCH 31,                      2000                           1999                          1998
----------------------------------------------------------------------------------------------------------------------
                                               Weighted-                      Weighted-                      Weighted-
                                               average                        average                        average
                                               exercise                       exercise                       exercise
                                Shares          price          Shares          price          Shares          price
----------------------------------------------------------------------------------------------------------------------
<S>                            <C>             <C>            <C>             <C>            <C>             <C>
Outstanding at
  beginning of year            228,300         $11.87         165,450         $10.80         127,300         $ 9.57
Granted                         27,500           9.90          79,450          12.48          47,000          13.58
Forfeited                      (12,850)         11.88         (11,600)          9.66          (8,750)          6.52
Exercised                           --             --          (5,000)         12.19            (100)         10.00
----------------------------------------------------------------------------------------------------------------------
Options outstanding at
  end of year                  242,950         $11.65         228,300         $11.87         165,450         $10.80
----------------------------------------------------------------------------------------------------------------------
</TABLE>

The weighted  average fair value of options  granted during the year ended March
31, 2000 was $2.38.

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

NET INCOME:                       2000               1999                1998
--------------------------------------------------------------------------------
As reported                   $1,323,880          $1,847,546          $1,805,483
Pro forma                      1,283,921           1,661,854           1,696,279

NET INCOME PER SHARE:     Basic   Diluted   Basic    Diluted   Basic   Diluted
--------------------------------------------------------------------------------
As reported              $0.52     $0.52    $0.72     $0.71    $0.71    $0.70
Pro forma                 0.50      0.50     0.68      0.64     0.66     0.65


34
<PAGE>



13. STOCK OPTION PLAN (CONTINUED)

The fair value of each option  granted is  estimated  on the date of grant using
the  Black-Sholes  option pricing model with the following  assumptions used for
grants for the year ended March 31,  2000: a risk-free  interest  rate of 5.24%,
dividend  yield of 2.00%,  expected  weighted  average  term of 10 years,  and a
volatility of 20.00%.


The following table summarizes  information about stock options  outstanding and
exercisable at March 31, 2000.

                                         Options Outstanding
--------------------------------------------------------------------------------
                                               Weighted            Weighted
                                                Average            Average
                                               Remaining           Exercise
                            Number of         Contractual           Price
                              Shares          Life (Years)         Per Share
--------------------------------------------------------------------------------
$ 6.50 - 9.50                 53,500              7.83               $ 8.71
$10.00 - 15.00               189,450              7.49                12.29
--------------------------------------------------------------------------------
                             242,950              7.57               $11.65
--------------------------------------------------------------------------------

14. COMMITMENTS AND CONTINGENCIES

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require   payment  of  a  fee.  The   Corporation   evaluates  each   customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained,  if
deemed  necessary  by the  Corporation  upon  extension  of credit,  is based on
management's  credit evaluation of the counterparty.  Collateral held varies but
may include single family  residences,  other residential  property,  commercial
property  and  land.  At  March  31,  2000,  the   Corporation  had  outstanding
commitments to originate  loans with variable  interest  rates of  approximately
$7,151,000 and loans with fixed rates of approximately  $5,694,000. In addition,
unused lines of credit amounted to approximately $3,352,000 at March 31, 2000.

LEASES

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

        Year Ending
         March 31                    Amount
--------------------------------------------------------------------------------
          2001                     $ 224,000
          2002                       231,000
          2003                       198,000
          2004 and thereafter        808,000
--------------------------------------------------------------------------------
                                  $1,461,000
--------------------------------------------------------------------------------

Total lease  expense  was  $219,000,  $157,000,  and $31,200 for the years ended
March 31, 2000, 1999, and 1998, respectively.

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

                                                                              35
<PAGE>


15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

YEAR ENDED MARCH 31, 2000
--------------------------------------------------------------------------------
                                       First    Second     Third    Fourth
                                      Quarter   Quarter   Quarter   Quarter
--------------------------------------------------------------------------------
Total interest income                 $ 3,631   $ 3,857   $ 4,433   $ 4,219
Total interest expense                  1,860     1,979     2,411     2,466
--------------------------------------------------------------------------------
Net interest income                     1,771     1,878     2,022     1,753
Provision for loan losses                  69       110       122       (18)
--------------------------------------------------------------------------------
Net interest income after provision
  for loan losses                       1,702     1,768     1,900     1,771
Other income                            1,089       867       935       606
Other expenses                          1,924     1,953     2,219     2,449
--------------------------------------------------------------------------------
Income before income (loss) taxes         867       682       616       (72)
Income tax expense (benefit)              356       312       185       (83)
--------------------------------------------------------------------------------
Net income                            $   511   $   370   $   431    $   11
--------------------------------------------------------------------------------
Earnings per share
  Basic                               $   .20   $   .14   $   .17    $  .01
  Diluted                             $   .20   $   .14   $   .17    $  .01
--------------------------------------------------------------------------------


YEAR ENDED MARCH 31, 1999
--------------------------------------------------------------------------------
                                       First    Second     Third    Fourth
                                      Quarter   Quarter   Quarter   Quarter
--------------------------------------------------------------------------------
Total interest income                 $3,551   $3,557   $3,574   $3,567
Total interest expense                 1,815    1,838    1,899    1,781
--------------------------------------------------------------------------------
Net interest income                    1,736    1,719    1,675    1,786
Provision for loan losses                 75       25       36      224
--------------------------------------------------------------------------------
Net interest income after provision
  for loan losses                      1,661    1,694    1,639    1,562
Other income                             395      397    1,029      826
Other expenses                         1,173    1,427    1,635    1,793
--------------------------------------------------------------------------------
Income before income taxes               883      664    1,033      595
Income tax expense                       376      291      420      241
--------------------------------------------------------------------------------
Net income                            $  507   $  373   $  613   $  354
--------------------------------------------------------------------------------
Earnings per share
  Basic                               $  .20   $  .14   $  .24   $  .14
  Diluted                             $  .19   $  .13   $  .24   $  .15
--------------------------------------------------------------------------------

36
<PAGE>


                                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


16. CONDENSED FINANCIAL INFORMATION OF THE CORPORATION (PARENT COMPANY ONLY)

CONDENSED STATEMENTS OF FINANCIAL CONDITION

MARCH 31,                                               2000             1999
--------------------------------------------------------------------------------

ASSETS
Investment in the Bank, at equity                   $23,957,601      $23,613,677
Cash                                                    161,712          651,510
Prepaid expenses and other assets                        88,850           53,250
--------------------------------------------------------------------------------
                                                    $24,208,163      $24,318,437
--------------------------------------------------------------------------------

LIABILITIES AND STOCKHOLDERS' EQUITY

Liabilities                                         $        --      $        --
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
  Common stock                                           25,115           25,721
  Additional paid-in capital                          4,782,029        4,897,207
  Retained earnings                                  19,401,019       19,395,509
--------------------------------------------------------------------------------

Total stockholders' equity                           24,208,163       24,318,437
--------------------------------------------------------------------------------

                                                    $24,208,163      $24,318,437
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF INCOME

YEAR ENDED MARCH 31,                                 2000           1999          1998
-------------------------------------------------------------------------------------------
<S>                                              <C>            <C>            <C>
INCOME
  Dividend from Bank                             $ 1,000,000    $        --    $        --
  Interest income                                     14,089          9,333             --
-------------------------------------------------------------------------------------------
Total income                                       1,014,089          9,333             --
-------------------------------------------------------------------------------------------
NONINTEREST EXPENSES                                 (46,399)       (42,535)       (55,652)
-------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE EQUITY IN UNDISTRIBUTED
    NET INCOME OF THE BANK                           967,690        (33,202)       (55,652)
Equity in undistributed net income of the Bank       343,924      1,868,145      1,840,010
-------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES                         1,311,614      1,834,943      1,784,358
Income expense (benefit)                             (12,266)       (12,603)       (21,125)
-------------------------------------------------------------------------------------------
NET INCOME                                       $ 1,323,880    $ 1,847,546    $ 1,805,483
-------------------------------------------------------------------------------------------
</TABLE>

                                                                              37
<PAGE>


COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY


16. CONDENSED FINANCIAL INFORMATION OF THE CORPORATION (PARENT COMPANY ONLY)
    (CONTINUED)


CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

YEAR ENDED MARCH 31                                         2000          1999           1998
-------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>            <C>
OPERATING ACTIVITIES
Net income                                             $ 1,323,880    $ 1,847,546    $ 1,805,483
Adjustments
    Equity in undistributed income of the Bank            (343,924)    (1,868,145)    (1,840,010)
    (Increase) decrease in prepaid and other assets        (35,600)       (12,603)       (21,128)
-------------------------------------------------------------------------------------------------

Net cash provided (absorbed) by operating activities       944,356        (33,202)       (55,655)
-------------------------------------------------------------------------------------------------

INVESTING ACTIVITIES

Net cash provided by investing activities                       --             --             --
-------------------------------------------------------------------------------------------------

FINANCING ACTIVITIES
  Cash dividends paid on common stock                     (819,493)      (796,410)      (715,058)
  Repurchase common stock                                 (614,661)            --             --
  Stock options exercised                                       --        123,700         57,001
-------------------------------------------------------------------------------------------------

Net cash absorbed by financing activities               (1,434,154)      (672,710)      (658,057)
-------------------------------------------------------------------------------------------------

DECREASE IN CASH                                          (489,798)      (705,912)      (713,712)
CASH, beginning of year                                    651,510      1,357,422      2,071,134
-------------------------------------------------------------------------------------------------

CASH, end of year                                      $   161,712    $   651,510    $ 1,357,422
-------------------------------------------------------------------------------------------------
</TABLE>


38
<PAGE>


                                                         STOCKHOLDER INFORMATION

CORPORATE PROFILE
--------------------------------------------------------------------------------

     Community Bank was organized in 1928 as a  Virginia-chartered  building and
loan  association,   converted  to  a   federally-chartered   savings  and  loan
association in 1955 and to a federally-chartered  savings bank in 1983. In 1988,
Community Bank converted to the stock form of organization  through the sale and
issuance  of  656,134  shares  of its  common  stock.  Community  Financial  was
organized  in 1989 for the  purpose  of  becoming a thrift  institution  holding
company.  Effective  January 31,  1990,  Community  Bank  completed  the holding
company  reorganization of the bank and Community  Financial acquired all of the
issued and  outstanding  shares of common stock of Community  Bank. In 1996, the
Community  Financial  changed its place of  incorporation to the Commonwealth of
Virginia from the State of Delaware.

     The  principal  asset of Community  Financial is the  outstanding  stock of
Community Bank, its wholly owned subsidiary.  Community  Financial presently has
no  separate  operations  and its  business  consists  only of the  business  of
Community Bank.  Community  Bank's primary  business is the promotion of savings
through the  solicitation  of savings  accounts from the general  public and the
promotion of home ownership through the granting of mortgage loans, primarily to
finance the purchase, construction and improvement of real estate.

     Both Community Financial and Community Bank conduct business through a main
office located at 38 North Central  Avenue,  Staunton,  Virginia 24401, a second
Staunton  office at 101 Community Way,  Staunton,  Virginia  24401, a Waynesboro
office at 2934 West Main Street,  Waynesboro,  Virginia  22980,  a Stuarts Draft
office at Routes 340 and 608,  Stuarts  Draft,  Virginia  24477 and two Virginia
Beach offices at 5300 Kemps River Drive,  Suite 100,  Virginia  Beach,  Virginia
23467 and 621 Nevan  Road,  Virginia  Beach,  Virginia.  The Bank's  subsidiary,
Community  First  Mortgage  Corporation,  conducts  business  at 9201  Arboretum
Parkway, Suite 210, Richmond, Virginia 23236.

FORM 10-KSB REPORT
--------------------------------------------------------------------------------

     A copy of our Annual  Report on Form 10-KSB for the fiscal year ended March
31,  2000  including  financial  statements,  as filed  with  the  SEC,  will be
furnished  without charge to our  stockholders of record upon written request to
the  Secretary,  Community  Financial  Corporation,  38  North  Central  Avenue,
Staunton, Virginia 24401.

INDEPENDENT AUDITORS                       LEGAL COUNSEL
                                           Nelson, McPherson, Summers & Santos
BDO Seidman, LLP                           12 North New Street
300 Arboretum Place                        Staunton, Virginia  24401
Suite 520
Richmond, Virginia  23236                  Silver, Freedman & Taff, L.L.P.
                                           1100 New York Avenue, N.W.
MARKET MAKERS                              7th Floor-East
                                           Washington, D.C.  20005
Scott & Stringfellow, Inc
Knight Securities L.P.                     Williams, Mullen, Christian & Dobbins
Anderson & Strudwick, Inc.                 Two James Center
Sandler O'Neill & Partners                 1021 East Cary Street
                                           Richmond, Virginia 23210
TRANSFER AGENT
Community  Bank
acts as Transfer Agent for
Community Financial Corporation



                                                                              39
<PAGE>



COMMUNITY FINANCIAL CORPORATION AND SUBSIDIARY



COMMON STOCK

     As of May 31,  2000,  there  were  approximately  553  holders of record of
Community Financial common stock.  Community Financial common stock is traded on
the Nasdaq Small Cap Market under the symbol "CFFC." The  shareholders of record
number does not reflect  persons or entities  who hold their stock in nominee or
"street" name.

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


Fiscal 2000               High          Low         Close    Dividend Declared
                          ----          ---         -----    -----------------

June 1999                $11.50       $10.75       $11.50       $  .08
September 1999            12.00        10.25        10.63          .08
December 1999             12.00         9.00        10.13          .08
March 2000                11.50         9.63         9.63          .08


Fiscal 1999               High          Low         Close    Dividend Declared
                          ----          ---         -----    -----------------

June 1998                $16.38       $14.50       $15.00       $  .07
September 1998            15.00        10.75        12.50          .08
December 1998             12.50        11.00        11.88          .08
March 1999                11.88        10.75        10.75          .08



     Dividend payment  decisions are made by the Board of Directors of Community
Financial  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 8 of the Notes to Consolidated Financial
Statements contained in this Annual Report.




40
<PAGE>

<PAGE>


[TWO PICTURES]      [COMMUNITY FIRST MORTGAGE CORPORATION LOGO]


Community First Mortgage Corporation Employees
Tony Bottoms
President

Harril Whitehurst
Executive Vice-President

June Bethea
Kerri Bliss
Lorey Bowles
Karen Brown
Debbie Clendenin
Lisa Collins
Mary Jean Davis
Steve Davis
Tom Gill
Carol Harris
Bobbi Heath
Clayton Hicks
Lisa Kurtz
Jason Marrugi
Julie Miller
Susan Miller
Rick Perkins
Sandy Redd
Cheryl Simpson
Molly Stout
Becky Tinsley
Chris Vick

DURING  THE  FISCAL  YEAR  ENDING  MARCH  31,  2000  Community   First  Mortgage
Corporation closed over $78.3 million in permanent  residential  mortgage loans.
Approximately   53%  of  those  new  loans  were   originated  by  the  Mortgage
Corporation's  retail  division,   which  has  offices  in  Staunton/Waynesboro,
Richmond and Virginia Beach.  The Company's  wholesale  division  originated the
remaining loan volume. However, due to the sharp increase in interest rates that
occurred  during the year, the  determination  was made in December to cease the
wholesale lending operations.

During the year, the Company hired two experienced loan officers in the Richmond
market,  Christopher S. Vick and Thomas A. Gill. These two successful and highly
motivated  individuals  have  already  made  significant  contributions  to  the
Company's retail loan production during the year.

In May of 1999,  Community First established a construction  lending division to
serve  the  needs  of the  medium-sized  builders  in the  Richmond  market.  In
cooperation   with  the  Company's  retail  mortgage   lending   division,   the
construction  lending  division  attracted  many  excellent  local  builders and
developed  and  implemented a very  attractive  construction  to permanent  loan
product.  At fiscal year end the  construction  lending  division had originated
over $10.0  million in  construction  loans,  with $7.7  million in  outstanding
commitments and $2.8 million disbursed.


                                                                              41