UNITED STATES


SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549





FORM 10-Q


(Mark One)


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





For the quarterly period ended    September 30, 2009.


OR


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





For the transition period from __________________________ to__________________________





Commission file number    000-18261








COMMUNITY FINANCIAL CORPORATION(Exact name of registrant as specified in its charter)








VIRGINIA

54-1532044(State or other jurisdiction of incorporation or organization)

(IRS Employer Identification Number)








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








(540) 886-0796(Issuer’s telephone number)








(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 and 15(d) of the Securities Exchange Act of 1934  during the past 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes x   No  o





Indicate by check mark whether the registrant (1) has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (& 232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes    No





Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a small reporting company.  See definition of “large accelerated filer, accelerated filer and small reporting company” in Rule 12b-2 of the Exchange Act:




Large accelerated filer  o      Accelerated filer   o    Non-Accelerated filer    o      Smaller
reporting company  x


(do not check if a small


reporting company)





Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes   o        No  x





Number of shares of common stock, par value $.01 per share, outstanding at the close of business on November 10, 2009:4,361,658.











COMMUNITY FINANCIAL CORPORATION








INDEX








PART I.
FINANCIAL INFORMATIONItem 1.
Consolidated Financial StatementsConsolidated Balance Sheets at September 30, 2009 (unaudited)
and March 31, 2009
3Consolidated Statements of Operations for the
Three and Six Months Ended September 30, 2009 and 2008
(unaudited)
4Consolidated Statements of Cash Flows for the Six
Months Ended September 30, 2009 and 2008 (Unaudited)
5Notes to Unaudited Interim Consolidated
Financial Statements
6Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
14Item 3.
Quantitative and Qualitative Disclosures About Market Risk
22Item 4T.
Controls and Procedures
22PART II.
OTHER INFORMATION
24Signature Page

25Exhibit Index

26











2










Part I. Financial Information


Item 1. Financial Statements


COMMUNITY FINANCIAL CORPORATIONCONSOLIDATED BALANCE SHEETSSeptember 30,


March 31,2009


2009(Unaudited)ASSETSCash (including interest-bearing deposits of approximately $671,282 and $512,258)

$
4,524,964


$
2,482,182SecuritiesHeld to maturity


1,500,000



1,700,010Available for sale, at fair value


196,497



207,347Restricted investment in Federal
Home Loan Bank stock, at cost


6,183,600



5,238,600Loans receivable, net of allowance for loan
losses of $6,478,554 and $5,955,847


500,434,646



476,950,379Real estate owned and repossessed assets


2,639,420



1,400,192Property and equipment, net


8,575,273



8,351,679Accrued interest receivableLoans


2,026,299



1,973,676Investments


6,335



2,799Prepaid expenses and other assets


15,084,838



14,416,972Total Assets

$
541,171,872


$
512,723,836LIABILITIES AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits

$
388,964,736


$
365,505,504Borrowings


100,625,000



95,000,000Securities sold under agreement to repurchase


959,367



1,475,594Advance payments by borrowers for
taxes and insurance


155,757



179,575Other liabilities


2,604,824



4,226,600Total Liabilities


493,309,684



466,387,273Stockholders’ EquityPreferred stock $.01 par value, authorized 3,000,000shares, 12,643 shares outstanding


12,643,000



12,643,000Common stock, $0.01 par value, authorized
10,000,000 shares, 4,361,658
shares outstanding


43,617



43,617Warrants


603,153



603,153Discount on preferred


(508,655)



(568,973)Additional paid in capital


5,569,558



5,569,558Retained earnings


29,885,746



28,420,439Accumulated other comprehensive (loss)


(374,231)



(374,231)Total Stockholders' Equity


47,862,188



46,336,563Total Liabilities and Stockholders' Equity


$541,171,872



$512,723,836


See accompanying notes to unaudited interim consolidated financial statements.


3


CONSOLIDATED STATEMENTS OF OPERATIONSThree Months Ended


Six Months EndedSeptember 30


September 302009


2008


2009


2008(Unaudited)


(Unaudited)INTEREST INCOMELoans

$
7,115,854


$
7,185,657


$
13,974,885


$
14,338,826Investment securities


11,178



32,187



25,126



67,020Other


40,221



124,392



65,848



416,182Total interest income


7,167,253



7,342,236



14,065,859



14,822,028INTEREST EXPENSEDeposits


1,775,889



2,617,460



3,970,129



5,493,791Borrowed money


252,468



691,241



499,867



1,287,864Total interest expense


2,028,357



3,308,701



4,469,996



6,781,655NET INTEREST INCOME


5,138,896



4,033,535



9,595,863



8,040,373PROVISION FOR LOAN LOSSES


651,431



600,544



932,235



752,542NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES


4,487,465



3,432,991



8,663,628



7,287,831NONINTEREST INCOME (LOSS)Service charges, fees and commissions


862,449



752,522



1,717,032



1,497,736Other


135,733



96,071



225,428



190,849Securities impairment


---



(11,053,341
)


---



(11,053,341
)Total noninterest income (loss)


998,182



(10,204,748
)


1,942,460



(9,364,756
)NONINTEREST EXPENSECompensation & benefits


2,140,762



1,983,652



4,458,694



3,928,904Occupancy


402,482



393,533



802,422



736,064Data processing


407,839



383,391



785,188



694,031Federal insurance premium


177,108



99,108



522,658



169,845Advertising


105,965



113,202



228,413



207,524Other


474,099



456,698



846,643



940,026Total noninterest expense


3,708,255



3,429,584



7,644,018



6,676,394INCOME (LOSS) BEFORE TAXES


1,777,392



(10,201,341
)


2,962,070



(8,753,319
)INCOME TAXES


655,275



288,855



1,120,371



771,461NET INCOME (LOSS)

$
1,122,117


$
(10,490,196
)

$
1,841,699


$
(9,524,780
)Effective Dividend on Preferred Stock

$
188,197


$
---


$
376,394


$
---NET INCOME (LOSS) AVAILABLE
TO COMMON STOCKHOLDERS

$
933,920


$
(10,490,196
)

$
1,465,305


$
(9,524,780
)BASIC EARNINGS (LOSS) PER
COMMON SHARE

$
0.21


$
(2.41
)

$
0.34


$
(2.19
)DILUTED EARNINGS (LOSS) PER
COMMON SHARE

$
0.21


$
(2.41
)

$
0.34


$
(2.19
)DIVIDENDS PER COMMON SHARE

$
0.00


$
0.065


$
0.00


$
0.13


See accompanying notes to unaudited interim consolidated financial statements.


4


COMMUNITY FINANCIAL CORPORATIONCONSOLIDATED STATEMENTS OF CASH FLOWSSix Months EndedSeptember 302009


2008(Unaudited)


(Unaudited)OPERATING ACTIVITIESNet income (loss)

$
1,841,699


$
(9,524,780
)Adjustments to reconcile net income (loss) tonet cash provided by operating activitiesProvision for loan losses


932,235



752,542Depreciation


310,483



283,280Stock-based compensation expense


---



6,826Amortization of premium and accretionof discount on securities, net


2



188Securities impairment


---



11,053,341Increase(decrease) in net deferred loan fees


85,475



(70,432
)(Decrease) in deferred income taxes


(1,266,085
)


(94,464
)Decrease in other assets


598,219



997,433(Decrease) in other liabilities


(1,621,776
)


(707,520
)Net cash provided by operating activities


880,252



2,696,414INVESTING ACTIVITIESProceeds from maturities of held to maturity securities


200,000



1,700,000Purchase of held to maturity securities
Proceeds from sale of available for  sale securities


(500,00042,499
)


(1,600,000---
)Net increase in loans


(23,980,262
)


(22,502,194
)Purchases of property and equipment


(667,408
)


(748,523
)(Purchase) of FHLB stock


(945,000
)


(270,000
)(Increase) in repossessed assets and real estate owned


(1,239,228
)


(1,519,683
)Net cash absorbed by investing activities


(27,089,399
)


(24,940,400
)FINANCING ACTIVITIESDividends paid


(316,076
)


(565,813
)Net increase in deposits


23,459,232



859,800Proceeds from advances and other borrowed money


5,108,773



8,175,836Proceeds from issuance of common stock


---



169,501Net cash provided by financing activities


28,251,929



8,639,324(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS


2,042,782



(13,604,662
)CASH AND CASH EQUIVALENTS – beginning of period


2,482,182



15,998,041CASH AND CASH EQUIVALENTS – end of period

$
4,524,964


$
2,393,379See accompanying notes to unaudited interim consolidated financial statements





5


COMMUNITY FINANCIAL CORPORATION


NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


SEPTEMBER 30, 2009





NOTE 1. - BASIS OF PRESENTATION





The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting principles for complete financial statements.





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





In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the six months ended September 30, 2009 are not necessarily indicative of the results that may be expected for the year ending March 31, 2010.





The Company made application to the Treasury Department to participate in the TARP program and received an investment by the Treasury Department of $12,643,000 in the form of preferred stock during the year ended March 31, 2009.  The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares
of common stock at $5.40 per share.





Subsequent events have been evaluated through November 12, 2009, the same date on which these financial statements were issued.





NOTE 2. - STOCK-BASED COMPENSATION PLAN




The Company recognizes the cost of employee services received in exchange for awards of equity instruments, such as stock options and restricted stock, based on the fair value of those awards at the date of grant.




There were no stock options granted and no stock-based compensation expense was recognized during the three and six month periods ended September  30, 2009 and September 30, 2008.




The following summarizes the stock option activity for the three months ended September 30, 2009:





Weighted

IntrinsicWeighted


Average

Value ofAverage


Remaining

UnexercisedExercise


Contractual

In-the-MoneyShares


Price


Term

OptionsOptions outstanding, March 31, 2009


380,200


$
8.41Granted


---



---Exercised


---



---Forfeited


(43,000
)


6.36Options outstanding, September 30, 2009


337,200


$
8.55



4.1Options exercisable, September 30, 2009


337,200


$
8.55



4.1

0




There were no options exercised during the six months ended September 30, 2009.











6


NOTE 3. - EARNINGS PER SHARE





Basic earnings per share is based on net income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share shows the dilutive effect of additional common shares issuable under stock option plans and warrants. Diluted earnings
per share is computed by dividing net income available to common stockholders  by the weighted average number of common shares and common share equivalents outstanding. Basic and diluted earnings per share are computed in the following table.





For the Three Months EndedSeptember 30, 2009


September 30, 2008Weighted Average


Per Share





Weighted Average


Per ShareIncome


Shares


Amount


Income


Shares


AmountBasic earnings (loss) per share:Income (loss) available to common stockholders

$
933,920



4,361,658


$
0.21


$
(10,490,196
)


4,357,684


$
(2.41
)Diluted earnings (loss) per share:Effect of Dilutive SecuritiesOptions and Warrants


---



---







---



---Income (loss) available to common stockholders

$
933,920



4,361,658


$
0.21


$
(10,490,196
)


4,357,684


$
(2.41
)




During the quarter ended September 30, 2009,337,200 stock options and 351,194 warrants were excluded in the calculation of earnings per share because they would have been anti-dilutive. During the quarter ended September 30, 2008, 380,200 stock options were
excluded in the calculation of earnings per share because they would have been anti-dilutive.




For the Six Months EndedSeptember 30, 2009


September 30, 2008Weighted Average


Per Share





Weighted Average


Per ShareIncome


Shares


Amount


Income


Shares


AmountBasic earnings(loss) per share:Income (loss) available to common stockholders

$
1,465,305



4,361,658


$
0.34


$
(9,524,780
)


4,350,192


$
(2.19
)Diluted earnings (loss) per share:Effect of Dilutive SecuritiesOptions and Warrants


---



---







---



---Income (loss) available to common stockholders

$
1,465,305



4,361,658


$
0.34


$
(9,524,780
)


4,350,192


$
(2.19
)







7


NOTE 4. - STOCKHOLDERS' EQUITY





The following table presents the Bank's regulatory capital levels at September 30, 2009:





Amount
Required


Percent
Required


Actual
Amount


Actual
Percent


Excess
AmountTangible Capital

$
8,105,000



1.50
%

$
45,163,000



8.36
%

$
37,058,000Core Capital


21,614,000



4.00



45,163,000



8.26



23,549,000Risk-based Capital


37,399,000



8.00



49,345,000



10.56



11,946,000





The Company’s primary source of funds for the payment of dividends to its stockholders is dividends from the Bank. Capital distributions by OTS-regulated savings banks, such as the Bank, 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 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 the same period. Any distributions in excess of that amount requires prior OTS approval. The Capital Distribution Regulation requires that savings banks in holding company structures provide the applicable OTS Regional Director
with a 30-day advance written notice of all proposed capital distributions whether or not advance approval is required by the regulation. The OTS may object to capital distributions if the bank is not meeting its regulatory capital requirements, the distribution raises safety and soundness concerns or is otherwise in violation of law. Issuance of preferred stock under the TARP and Capital Purchase Plan restricts the Company from increasing its dividend distribution to stockholders without approval from the OTS.





NOTE 5. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS





Total interest paid for the six months ended September 30, 2009 and 2008 was $6,220,251 and $7,358,584, respectively. Total income taxes paid for the six months ended September 30, 2009 and 2008 was $1,358,708 and $1,003,776.





NOTE 6. - COMPREHENSIVE INCOME





Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." Comprehensive
income for the Company includes net income, unrealized gains and losses on securities available for sale and pension liability adjustments. The following table sets forth the components of comprehensive income for the three-month periods ended September 30, 2009 and 2008:





Six months Ended September 302009


2008Net Income (loss)

$
1,841,699


$
(9,524,780
)Other comprehensive income (loss), net of tax:Unrealized holding (losses) on available for sale securities
arising during the period, net of deferred tax of $829,636


---



(9,699,725
)Adjustments for realized securities losses, net of tax of $0


---



11,053,341Total other comprehensive income (loss), net of tax


---



1,353,616Total comprehensive income (loss)

$
1,841,699


$
(8,171,164
)








8


NOTE 7. – DEFINED BENEFIT PENSION PLAN





The Company has a non-contributory defined benefit pension plan for which the components of net periodic benefit cost are as follows:





Three Months EndedSeptember 302009


2008Service cost

$
84,954


$
87,669Interest cost


58,964



53,010Expected return on plan assets


(61,538
)


(64,175
)Recognized net actuarial loss


4,984



4,888$
87,364


$
81,392







Six Months EndedSeptember 302009


2008Service cost

$
169,908


$
175,338Interest cost


117,928



106,020Expected return on plan assets


(123,076
)


(128,350
)Recognized net actuarial loss


9,968



9,776$
174,728


$
168,128





As disclosed in the Company’s Form 10-K for the year ended March 31, 2009, a contribution of $450,000 to its pension plan is expected during the current fiscal year. As of September 30, 2009, no contributions have been made. The Company anticipates making all required contributions prior to March 31, 2010.





NOTE 8. – SECURITIES





At September 30, 2009, due to the conservatorship of Fannie Mae and Freddie Mac in September, 2008 and the related restrictions on its outstanding preferred stock (including the elimination of dividends), the Company recorded an other than temporary impairment (OTTI) non-cash charge with respect to the Fannie Mae
and Freddie Mac preferred stock it owns of $11,053,000 for the quarter ended September 30, 2008 and an additional OTTI charge of $482,000 in the December 31, 2008 quarter. The Company recorded a tax related benefit of $4,384,000 for the two OTTI non-cash charges for the quarter ended December 31, 2008. One of the preferred stock issues is the Freddie Mac preferred series L with a par value of $50 per share. The dividend rate of this issue resets every five years based on the five year treasury rate. The next
dividend reset date for this security is December 31, 2009.





Management evaluates securities for other than temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation.  Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) whether the Company intends to sell the investments or it is more likely than not that the Company will be required to sell the investments before recovery of their amortized cost basis.


9


NOTE 9 - FAIR VALUE MEASUREMENTS




Generally accepted accounting principles, define fair value, establish a framework for measuring fair value, establish a three-level valuation hierarchy for disclosure of fair value measurement and enhance disclosure requirements for fair value measurements. The valuation hierarchy is based upon the transparency of
inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follow:







·Level 1
Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.·Level 2
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instrument.·Level 3
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.






Following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy:




Securities




Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using
pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S. agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy.  Currently, all of the Company’s
securities are considered to be Level 2 securities.







The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of September 30, 2009:





Fair Value Measurements at September 30, 2009 UsingDescription

Balance as of
September 30,
2009


Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Unobservable
Inputs
(Level 3)AssetsAvailable-for-sale securities

$
196,497


$
-


$
196,497


$
-





Certain financial assets are measured at fair value on a nonrecurring basis in accordance with generally accepted accounting principles. Adjustments to the fair value of these assets usually result from the application of lower-of-cost-or-market accounting or write-downs of individual assets.





The following describes the valuation techniques used by the Corporation to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements:




Impaired loans




Generally accepted accounting principles apply to loans measured for impairment using  practical expedients, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s
collateral, when the loan is dependent on


10




collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral.







The following table summarizes the Corporation’s financial assets that were measured at fair value on a nonrecurring basis during the period.





Carrying Value at September 30, 2009Description

Balance as of
September 30,
2009


Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Unobservable
Inputs
(Level 3)AssetsImpaired loans net of
valuation allowance

$
8,266,852


$
-


$
-


$
8,266,852







Other real estate owned




Certain assets such as other real estate owned (OREO) are measured at the lesser of cost and fair value less cost to sell.





The following table summarizes the Corporation’s nonfinancial assets that were measured at fair value on a nonrecurring basis during the period.





Carrying Value at September 30, 2009Description

Balance as of
September 30,
2009


Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)


Significant
Other
Observable
Inputs
(Level 2)


Significant
Unobservable
Inputs
(Level 3)AssetsOther real estate

$
2,639,420


$
-


$
-


$
2,639,420





The accounting standard excludes certain financial instruments and all non-financial instruments from its disclosure requirements.  Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Corporation.





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





Cash and cash equivalents





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





Securities





Fair values for securities, excluding Federal Home Loan Bank stock, are based on quoted market prices or dealer quotes.  If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities.  The carrying
value of Federal Home Loan Bank stock approximates fair value based on the redemption provisions of the Federal Home Loan Bank. The Corporation’s investment in Federal Home loan Bank (“FHLB”) stock totaled $6.2 million at September 30, 2009. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost, because there is no market for the stock other than the FHLB’s


11


or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on ultimate recoverability of the par value rather than by recognizing temporary declines in value. Despite the FHLB’s temporary suspension of repurchases of excess capital stock in 2009, the Corporation does not
consider this investment to be other temporarily impaired at September 30, 2009 and no impairment has been recognized.





Loans receivable





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





Deposit liabilities





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





Borrowings





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





Securities sold under agreements to repurchase





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





Accrued interest





The carrying amounts of accrued interest approximate fair value.





Off-balance sheet instruments





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


12


September 30, 2009 and 2008, the fair value of loan commitments and standby letters of credit were deemed immaterial.





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





September 30, 2009


March 31, 2009(In Thousands)

Carrying
Amount


Fair
Value


Carrying
Amount


Fair
ValueFinancial assetsCash and cash equivalents

$
4,525


$
4,525


$
2,482


$
2,482Securities


1,696



1,697



1,907



1,919Federal Home Loan Bank stock, restricted


6,184



6,184



5,239



5,239Loans, net


500,435



511,891



476,950



487,788Accrued interest receivable


2,033



2,033



1,976



1,976Financial liabilitiesDeposits

$
388,965


$
395,025


$
365,506


$
373,896Borrowings


100,625



101,147



95,000



95,164Securities sold under agreements to repurchase


959



959



1,476



1,476Accrued interest payable


143



143



1,894



1,894





10.  Loans Receivable, Net





Loans receivable are summarized as follows:





September 30, 2009


March 31, 2009Residential real estate

$
143,300,045


$
140,063,979Commercial real estate


164,847,170



154,781,353Construction


67,146,243



62,887,605Commercial business


55,341,704



53,436,237Consumer


91,777,426



85,968,679522,412,588



497,137,853Less:Loans in process


16,410,723



15,221,797Deferred loan (costs), net


(911,335
)


(990,170
)Allowance for loan losses


6,478,554



5,955,84721,977,942



20,187,474$
500,434,646


$
476,950,379





Loans serviced for others amounted to approximately $249,129 at September 30, 2009, and $294,357 at March 31, 2009.  The loans are not included in the accompanying consolidated balance sheets.





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Allowance for loan losses is summarized as follows:





Six Months Ended
September 30, 2009


Year Ended
March 31, 2009Balance at beginning of year

$
5,955,847


$
3,214,771Provision for loan loss


932,235



4,285,389Loans charged-off


(474,024
)


(1,682,067
)Recoveries of loans previously charged-off


64,495



137,755Balance at end of period

$
6,478,554


$
5,955,847





Impaired loans with a valuation allowance of $2,285,973 totaled $10,515,649 at September 30, 2009 and impaired loans of $9,792,151 had a valuation allowance of $1,873,646 at March 31, 2009.





Impaired loans without a valuation allowance totaled $0 and $28,598 as of September 30, 2009, and March 31, 2009, respectively.





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





Nonaccrual loans excluded from impaired loan disclosure amounted to $12,875,207 at September 30, 2009 and $3,050,662 at March 31, 2009.  If interest on nonaccrual loans had been accrued, such income would have approximately $544,689 for the six months ended September 30, 2009 and $222,629 for the year ended
March 31, 2009.


14


Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND


RESULTS OF OPERATIONS.





EXECUTIVE SUMMARY





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





Net income for the six months ended September 30, 2009 increased $11,366,000 to $1,842,000 compared to ($9,525,000) for the six months ended September 30, 2008.  Net income for the six months increased due primarily to the absence of an Other Than Temporary Impairment (OTTI) adjustment in the current period
compared to an OTTI adjustment on our FHLMC and FNMA Available for Sale securities of $11,053,000 during the September 30, 2008 quarter, and a net interest income increase of $1.6 million, or 19.35%, partially offset by an increase in noninterest expense resulting from higher expenses associated with compensation and federal deposit insurance premiums. Net income for the six months ended September 30, 2008 excluding the OTTI would have been $1,528,000. Net income for the quarter ended September 30, 2009 increased
$11,424,000 to $1,122,000 compared to ($10,490,000) for the quarter ended September 30, 2008.  Net income for the quarter increased due primarily to the absence of an Other Than Temporary Impairment (OTTI) adjustment in the current period compared to an OTTI adjustment on our FHLMC and FNMA Available for Sale securities of $11,053,000 during the September 30, 2008 quarter, and a net interest income increase of $1.1 million, or 27.40%, partially offset by an increase in noninterest expense resulting
from higher expenses associated with compensation and federal deposit insurance premiums. Net income for the quarter ended September 30, 2008 excluding the OTTI would have been $563,000.





Net interest income for the quarter ended September 30, 2009 increased $1.1 million, or 27.4%, to $5.1 million compared to the quarter ended September 30, 2008. Net interest income, which is the difference between the interest income we earn on our interest-earning assets, such as loans and investment securities, and
the interest we pay on interest-bearing liabilities, which are primarily deposits and borrowings, was impacted by both the change in our volume of interest earning assets and the interest rate spread between interest-earning assets and interest-bearing liabilities. The primary factors contributing to the increase in net interest income for the quarter ended September 30, 2009 was the growth in interest-earning assets, primarily loans, and lower rates on interest-bearing liabilities. The increase in net interest
income for the current quarter was limited due to the elimination of dividends on the Freddie Mac and Fannie Mae preferred stock and Federal Home Loan Bank common stock owned by the Bank. We purchased $500,000 in investment securities during the three months ended September 30, 2009 and anticipate limited securities purchases during the remainder of the current fiscal year.





Management will continue to monitor asset growth to manage the level of regulatory capital and funds acquisition. We continue to monitor the impact changing interest rates may have on both the growth in interest-earning assets and our interest rate spread. The Bank has approximately $364.7 million in adjustable rate
loans, or 74.2% of total loans, which reprice in five years or less, many of which are subject to annual and lifetime interest rate limits. The pace and extent of future interest rate changes will impact the Company’s interest rate spread as well as limitations on interest rate adjustments on certain adjustable rate loans.





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Funding for the growth in interest-earning assets combined with a falling interest rate environment has impacted the composition of our interest-bearing liabilities. Deposits were up due to increases in interest and non-interest-bearing transaction accounts, time deposits and borrowed money.  Management
plans to remain competitive in our deposit pricing and anticipates that deposit growth will be the primary source of funding for asset growth during the remainder of the current fiscal year. Due to relative pricing advantages, we have utilized brokered deposits and increased borrowings during the September 30, 2009 quarter. During the September 30, 2009 quarter, we experienced continuing competition for time deposits. Management is cognizant of the potential for additional compression in the Bank’s margin
related to the need to acquire funds and the pace of interest rate changes. Management will continue to monitor the level of deposits and borrowings in relation to the current interest rate environment.




Growth in our loan portfolio so far this fiscal year has exceeded our expectations. Growth in the Bank's loan portfolio for the September 30, 2009 quarter was primarily in commercial real estate, residential first mortgages and home equity loans and lines, construction and commercial business loans. We expect to
focus our future loan growth primarily in the commercial real estate arena and to slow or moderate our construction loan growth due to a slower economy and underwriting changes to limit funding of speculative construction.  We have experienced reduced construction activity in our market areas while existing commercial real estate activity continues to be moderate. At September 30, 2009, our assets totaled $541.2 million, including net loans receivable of $500.4 million, compared to total assets of $512.7
million, including net loans receivable of $477.0 million, at March 31, 2009.  Commercial real estate loans were $164.8 million or 31.6%, residential first mortgage loans were $143.3 million or 27.4%, construction loans totaled $67.1 million or 12.9%, commercial business loans were $55.3 or 10.6%, and home equity loans and lines were $46.2 million or 8.8% of our total loan portfolio at September 30, 2009 compared to Commercial real estate loans of $154.8 or 31.1%, residential first mortgage loans of
$140.1 or 28.2%, construction loans of $62.9 million or 12.7%, commercial business loans were $53.4 million or 10.8%, and home equity loans and lines of $41.7 million or 8.4% at March 31, 2009.




At September 30, 2009, non-performing assets totaled approximately $15.5 million or 2.87% of assets compared to $9.0 million or 1.75% of assets at March 31, 2009. Our allowance for loan losses to non-performing assets was 41.8% and to total loans was 1.28% at September 30, 2009 compared to 66.43% and 1.25%, respectively
at March 31, 2009.  The increase in nonperforming assets consisted of $5.3 million of nonaccrual loans, which included residential permanent and construction loans, and commercial real estate, and $1.2 million of real estate owned and repossessed assets. Due primarily to the slowing economy, we expect an increase in non-performing assets in the future. Charge-offs of $474,000 during the six month period was primarily related to residential land lots and repossessed vehicles.




During our fiscal year 2009, we evaluated the benefits of the increased yields on our credit card portfolio with the higher risk and operating costs related to maintaining and servicing an unsecured credit card portfolio. We believed that offering a credit card product was important to our existing customer base
and for obtaining new customers. As a result of this evaluation, we entered into an agent-bank relationship with an unaffiliated non-bank pursuant to which our customers can obtain credit cards with the Community Bank brand and for which we earn commissions for new accounts and a percentage of interchange fees, but for which we incur no liability or credit risk. At the same time, we sold our existing credit card portfolio to that unaffiliated organization. During the June 30, 2008 quarter, we sold our credit
card portfolio with an approximate loan balance of $500,000, which resulted in a gain of $37,000.




Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions.  We have experienced stable
to moderate declines in real estate values in our market areas. The Company has experienced increases in delinquencies for the 2010 fiscal year. Delinquencies have increased from 3.43% at March 31, 2009 to 4.65% at September 30, 2009. General downward economic trends, reduced availability of commercial credit and increasing unemployment have negatively impacted the credit performance of commercial and


16


consumer credit, resulting in additional write-downs. While there have been increases in unemployment and announced layoffs by certain employers in our markets, there has not been a dramatic or widespread increase in unemployment to date.  Concerns over the stability of the financial markets and the economy
have resulted in decreased lending by other financial institutions to their customers and to each other.  This market turmoil and tightening of credit has led to increased delinquencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity.  Other financial institutions have experienced decreased access to deposits or borrowings.





Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more difficult and complex under these difficult market and economic conditions.  We also expect to face increased regulation and government oversight as a result of these downward
trends.  This increased government action may increase our costs and limit our ability to pursue certain business opportunities.  We also may be required to pay even higher FDIC premiums than the recently increased level, because financial institution failures resulting from the depressed market conditions have depleted and may continue to deplete the FDIC insurance fund and reduce the FDIC’s ratio of reserves to insured deposits.





We do not expect these difficult conditions to improve in the near future.  A worsening of these conditions would likely exacerbate the adverse effects of these difficult market and economic conditions on us, our customers and the other financial institutions in our market.  As a result, we may
experience increases in foreclosures, delinquencies and customer bankruptcies, as well as more restricted access to funds.





The Emergency Economic Stabilization Act of 2008 (“EESA”) authorized the U.S. Department of the Treasury (“Treasury Department”) to purchase from financial institutions and their holding companies up to $700 billion in mortgage loans, mortgage-related securities and certain other financial
instruments, including debt and equity securities issued by financial institutions and their holding companies in a troubled asset relief program (”TARP”).  The purpose of TARP is to restore confidence and stability to the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other.  The Treasury Department has allocated $250 billion towards the TARP Capital Purchase Program (“CPP”).  Under the CPP,
Treasury will purchase debt or equity securities from participating institutions.  The Company made application to the Treasury Department to participate in this program and received an investment by the Treasury Department of $12,643,000 in the form of preferred stock during the December 31, 2008 quarter.  The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares of common stock at $5.40 per share. The preferred shares pay a cumulative dividend of 5% per year for the
first five years and 9% per year thereafter.  The preferred shares are repayable at any time by the company at 100% of the issue price, subject to the approval of the Company’s federal regulator.




EESA also increased FDIC deposit insurance on most accounts from $100,000 to $250,000.  This increase is in place until the end of 2013 and is not covered by deposit insurance premiums paid by the banking industry.  In addition, the FDIC has implemented two temporary programs to provide deposit
insurance for the full amount of most non-interest bearing transaction accounts through the end of 2009 and to guarantee certain unsecured debt of financial institutions and their holding companies through June 2012.  We expect to participate only in the program that provides unlimited deposit insurance coverage through December 31, 2009 for noninterest-bearing transaction accounts (typically business checking accounts) and certain funds swept into noninterest-bearing savings accounts. Under that program,
we will pay a 10 basis points fee (annualized) on the balance of each covered account in excess of $250,000, while the extra deposit insurance is in place.At September 30, 2009, we had $4.7 million in such accounts in excess of $250,000.


17


The purpose of these legislative and regulatory actions is to stabilize the volatility in the U.S. banking system.  EESA, TARP and the FDIC’s regulatory initiatives may not have the desired effect.  If the volatility in the market and the economy continue or worsen, our business, financial
condition, results of operations, access to funds and the price of our stock could be materially and adversely impacted.





CRITICAL ACCOUNTING POLICIES




General




The Company's financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The financial information contained within our statements is, to a significant extent, financial information that is based on measures of the financial effects of transactions
and events that have already occurred. A variety of factors could affect the ultimate value that is obtained either when earning income, recognizing an expense, recovering an asset or relieving a liability. In addition, GAAP itself may change from one previously acceptable method to another method. Although the economics of our transactions would be the same, the timing of events that would impact our transactions could change.




Allowance for Loan Losses




The allowance for loan losses is an estimate of the losses that may be sustained in our loan portfolio. The allowance is based on generally accepted accounting principles which require that losses be accrued when they are probable of occurring and estimable and that losses be accrued based on the differences between
the value of collateral, present value of future cash flows or values that are observable in the secondary market and the loan balance.




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





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





A loan is considered impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment
include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.


18


Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount
of the shortfall in relation to the principal and interest owed.  Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price, or the fair value of the collateral if the loan is collateral dependent.




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





FINANCIAL CONDITION





The Company's total assets increased $28.5 million to $541.2 million at September 30, 2009 from $512.7 million at March 31, 2009 due to increases in loans receivable of $23.5 million, cash of $2.0 million, real estate owned of $1.2 million and Federal Home Loan Bank Stock of $945,000. The increase in loans was funded
with increases in savings and interest bearing deposits of $14.5 million, non-interest bearing deposits of $3.2 million, increases in FHLB advances and borrowings of $5.1 million and increases in time deposits of $5.7 million at September 30, 2009 from March 31, 2009. FHLB advances increased by $6.0 million and other borrowings decreased by $891,000.  Stockholders’ equity increased $1.6 million to $47.9 million at September 30, 2009, from $46.3 million at March 31, 2009, due to income for the
six months ended September 30, 2009 of $1.8 million partially offset by cash dividend payments.





At September 30, 2009, non-performing assets totaled approximately $15.5 million or 2.87% of assets compared to $9.0 million or 1.75% of assets at March 31, 2009.Non-performing assets at September 30, 2009 were comprised of repossessed assets of $2.6 million
and non accrual loans of $12.9 million. Included in the total non-performing assets at September 30, 2009, was one relationship of approximately $4.5 million which includes $3.3 million of raw land. At September 30, 2009, our allowance for loan losses to non-performing assets was41.8%and to total loans was 1.28% compared to 66.43% and 1.25%, respectively at March 31, 2009. At September 30,
2009, the percentage of delinquent loans to total loans was 4.65% compared to 3.43% at March 31, 2009. Our allowance for loan losses to total loans remained relatively unchanged at September 30, 2009 compared to March 31, 2009 because no significant additional specific allowances were considered warranted at September 30, 2009 on the Bank’s nonperforming assets and due to the growth in our loan portfolio. Based on current market values of the properties securing these loans, management anticipates no significant
losses in excess of the allowance for losses previously recorded.  Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.





As of September 30, 2009, there were also $10.0 million in loans with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms
and which may result in the future inclusion of such items in the non-performing loan categories. These loans are comprised primarily of non-owner occupied residential real estate loans. No individual loan in this category has a balance that exceeds $1.1 million.





19





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, and funds provided from operations. Management maintains investments in liquid assets based upon its assessment of (i) the 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. Management believes that the Bank will continue to have adequate liquidity for the foreseeable future. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is provided. As of September 30, 2009, the Bank’s liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 2.3%.




The Bank has a line of credit with the FHLB equal to 26% of the Bank’s assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Bank provides a blanket lien covering all of its residential first mortgage loans, home equity lines of credit, multi-family loans
and commercial loans. In addition, the Bank pledges as collateral its capital stock in and deposits with the FHLB. Based on the collateral pledged as of September 30, 2009, the total amount of borrowing available under the FHLB line of credit was approximately $130.0 million. At September 30, 2009, principal obligations to the FHLB consisted of $80,000,000 in floating-rate, overnight borrowings, $20,000,000 in fixed-rate convertible advances and a $4,000,000 letter of credit to the Treasurer of Virginia for public
deposits. The Company had a loan with a bank in the amount of $625,000 at September 30, 2009.




At September 30, 2009, we had commitments to purchase or originate $21.4 million of loans. Certificates of deposit scheduled to mature in one year or less at September 30, 2009, totaled $236.2 million. Based on our historical experience, management believes that a significant portion of such deposits will remain with
us. Management further believes that loan repayments and other sources of funds will be adequate to meet our foreseeable short-term and long-term liquidity needs. At September 30, 2009, we had brokered or internet time deposits of $19.6 million.





The Bank’s regulatory capital changed from “adequately capitalized” at September 30, 2008 to “well capitalized” at September 30, 2009 due to the issuance of preferred stock under the U.S. Treasury Capital Purchase Program. The Companyreceived
$12,643,000 from the U.S. Treasury through the sale of 12,643 shares of preferred stock. The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares of common stock at $5.40 per share. The preferred shares pay a cumulative dividend of 5% per year for the first five years and 9% per year thereafter.  The preferred shares are repayable at any time by the Company at 100% of the issue price, subject to the approval of the Company’s federal regulator.





RESULTS OF OPERATIONS





Three Months Ended September 30, 2009 and 2008.





General.  Net income for the three months ended September 30, 2009 increased $11.6 million or 110.7% to $1.1 million from ($10.5) million for the three months ended September 30, 2008. Net interest income increased $1.1 million, the provision for loan
losses increased 51,000, non-interest income increased $11.2 million and non-interest expense increased $279,000 during the three months ended September 30, 2009 compared to the same period in 2008. Return on equity for the three months ended September 30, 2009 was 9.47% compared to (30.41)% for the three month period ended September 30, 2008. Return on assets was.84% for quarter ended September 30, 2009 compared to (2.13)% for the same period in the previous
fiscal year.


20





Interest Income. Total interest income decreased by $175,000 to $7.2 million for the three months ended September 30, 2009, from $7.4 million for the three months ended September 30, 2008, due to lower yields partially offset by higher average loan balances.  Investment
securities income decreased by $21,000 due to lower average balances as a result of calls and maturities on securities. Other interest income decreased by $84,000 due to elimination of dividends on Fannie Mae and FHLB stocks.  The decrease in yields was due to lower market interest rates generally. The average yield earned on interest-earning assets was 5.68% for the three months ended September 30, 2009 compared to 6.18% for the three months ended September 30, 2008.





Interest Expense.  Total interest expense decreased by $1.3 million to $2.0 million for the quarter ended September 30, 2009, from $3.3 million for the quarter ended September 30, 2008. Interest on deposits decreased by $842,000 to $1.8 million for
the quarter ended September 30, 2009 from $2.6 million for the quarter ended September 30, 2008 due to a decrease in the average rate paid, partially offset by higher average deposit balances. Interest expense on borrowed money decreased by $439,000 to $252,000 for the quarter ended September 30, 2009 compared to $691,000 for the quarter ended September 30, 2008. A decrease in the average rate paid on borrowings from 2.63% to 0.92% offset by an increase in the average balance of borrowings from $104.5 million
for the September 30, 2008 quarter to $109.1 million for the September 30, 2009 quarter accounted for the decrease. The average rate paid on interest-bearing liabilities was 1.67% during the three months ended September 30, 2009 compared to 2.89% for the three months ended September 30, 2008.




Provision for Loan Losses.  The provision for loan losses increased $51,000 to $651,000 for the three months ended September 30, 2009, from $600,000 for the three months ended September 30, 2008. Charge-offs of $247,000 during the six month period
was primarily related to residential land lots and repossessed vehicles. The amount of the provision for loan losses for the quarter ended September 30, 2009 was based on management’s assessment of the inherent risk associated with the increase in our loan portfolio and the level of our allowance for loan losses. We provide valuation allowances for anticipated losses on loans and real estate when management determines that a significant decline in the value of the collateral or cash flows has occurred,
as a result of which the value of the collateral or cash flows is less than the amount of the unpaid principal of the related loan plus estimated costs of acquisition and sale. In addition, we also provide allowances based on the dollar amount and type of collateral securing our loans in order to protect against unanticipated losses. At September 30, 2009, management believes its allowance for loan losses was adequate to absorb any probable losses inherent in the Company’s loan portfolio. Although management
believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations.




Noninterest Income.  Noninterest income increased by $11.2 million to $998,000 for the three months ended September 30, 2009, from ($10.2) million for the three months ended September 30, 2008 due primarily to the absence of the Other Than Temporary Impairment
charge on our FHLMC and FNMA available for sale securities of $11,053,000 that occurred during the quarter ended September 30, 2008. Service charges, fees and commissions increased due to an increase in secondary mortgage fee income and deposit transaction account fees.  The Bank has established relationships with other institutions where the Bank receives fees in return for completed customer mortgage loan applications for the institution’s approval and funding. We anticipate these relationships
will continue to be a source of fee and service charge income for the Bank.





21


Noninterest Expense.  Noninterest expense increased by $279,000 to $3.7 million for the three months ended September 30, 2009 compared to the same period last year. The increase in noninterest expense resulted primarily from compensation related expenses
due generally to merit increases, increased federal deposit insurance premiums, and loan collection expenses.  The increase in loan collection expense is related to the increase in non-performing assets and the efforts to collect and/or dispose of these assets.





Federal deposit insurance premiums during the three months ended September 30, 2009 totaled $177,000, compared to $99,000 for the same period in 2008. Under FDIC’s current risk-based assessment rules, assessment rates range from 7 to 77.5 basis points.Rates
increase uniformly by 3 basis points effective January 1, 2011.




In addition to the regular quarterly assessments, due to losses and projected losses attributed to failed institutions, the FDIC imposed a special assessment of 5 basis points on the amount of each depository institution’s assets reduced by the amount of its Tier 1 capital (not to exceed 10 basis points of its
assessment base for regular quarterly premiums) as of June 30, 2009, which was collected on September 30, 2009.




As a result of a decline in the reserve ratio (the ratio of the Deposit Insurance Fund (“DIF”) to estimated insured deposits) and concerns about expected failure costs and available liquid assets in the DIF, the FDIC has adopted a rule requiring each insured institution to prepay on December 30, 2009 the estimated
amount of its quarterly assessments for the fourth quarter of 2009 and all quarters through the end of 2012 (in addition to the regular quarterly assessment for the third quarter which is due on December 30, 2009).  The prepaid amount is recorded as an asset with a zero risk weight and the institution will continue to record quarterly expenses for deposit insurance.  For purposes of calculating the prepaid amount, assessments are measured at the institution’s assessment rate as of September
30, 2009, with a uniform increase of 3 basis points effective January 1, 2011, and are based on the institution’s assessment base for the third quarter of 2009, with growth assumed quarterly at annual rate of 5%.  If events cause actual assessments during the prepayment period to vary from the prepaid amount, institutions will pay excess assessments in cash or receive a rebate of prepaid amounts not exhausted after collection of assessments due on June 13, 2013, as applicable.  Collection
of the prepayment does not preclude the FDIC from changing assessment rates or revising the risk-based assessment system in the future.  The rule includes a process for exemption from the prepayment for institutions whose safety and soundness would be affected adversely.





FDIC estimates that the reserve ratio (the ratio of the net worth of the DIF to estimated insured deposits) will reach the designated reserve ratio of 1.15% by 2017 as required by statute.





Taxes.  Taxes increased by $366,000 to $655,000 for the three months ended September 30, 2009, from a $289,000 tax provision for the three months ended September 30, 2008. The effective tax rate increased from 33.9% for the June 30, 2008 quarter to
36.9% for the September 30, 2009 quarter due to the decrease in tax preference income.





Six Months Ended September 30, 2009 and 2008.





General.  Net income (loss) for the six months ended September 30, 2009 increased $11.4 million to $1.8 million from ($9,525,000) for the six months ended September 30, 2008.  Net income for the six months increased due primarily to an Other
Than Temporary Impairment adjustment on our FHLMC and FNMA Available for Sale securities of $11,053,000 in the September 30, 2008 quarter, an increase in net interest


22


income and was offset by increases in noninterest expense resulting from higher expenses associated with compensation and federal deposit insurance premiums. Return on equity for the six months ended September 30, 2009 was 7.78% compared to (48.53)% for the six month period ended September 30, 2008. Return on assets was
..70% for six months ended September 30, 2009 compared to (3.88)% for the same period in the previous fiscal year.


Interest Income.  Total interest income decreased by $756,000 or 5.1% to $14.1 million for the six months ended September 30, 2009, from $14.8 million for the six months ended September 30, 2008 due to a decrease in loan yields, a decrease in average investment
security balances, the elimination of FHLMC common and preferred stock dividends and a lower dividend rate on the FHLB stock offset by an increase in average loan balances. The yield on loans and securities decreased from 6.31% to 5.70% for the same periods.





Interest Expense.  Total interest expense decreased by $2.3 million or 34.1% to $4.5 million for the six months ended September 30, 2009, from $6.8 million for the six months ended September 30, 2008. Interest on deposits decreased to $4.0 million for
the six months ended September 30, 2009, from $5.5 million for the same period last year due to a decrease in the average rate paid on deposit balances partially offset by an increase in the average deposit balances. The rate paid on deposits decreased from 3.14% for the six months ended September 30, 2008 to 2.15% for the same period in the current fiscal year. Interest expense on borrowed money decreased to $500,000 for the six months ended September 30,
2009 from $1.3 million for the six months ended September 30, 2008 due to a decrease in the average rate on borrowing balances offset by an increase in the average outstanding balance on borrowings. The average balance on borrowings increased from $97.1 million for the six months ended September 30, 2008 to $108.9 million for the six months ended September 30, 2009. The average rate paid on borrowings decreased from 2.65% for the six months ended September 30, 2008 to .92%
for the six month period ended September 30, 2009.





Provision for Loan Losses.  The provision for loan losses increased to $932,000 for the six months ended September 30, 2009 from $753,000 for the months ended September 30, 2008 based on managements’ review of the inherent risk associated with the
increase in the commercial real estate lending portfolio and anticipated charge-offs related to certain loans for which we have established specific reserves.





Noninterest Income.  Noninterest income (loss) increased by $11.3 million to $1.9 million for the six months ended September 30, 2009, from ($9.4) million for the six months ended September 30, 2008 due primarily to an Other Than Temporary Impairment adjustment
on our FHLMC and FNMA available for sale securities of $11.1 million in the prior period.





Noninterest Expenses.  Noninterest expenses increased $968,000 for the six months ended September 30, 2009, compared to the same period last year.  The increase in noninterest expense resulted primarily from compensation related expenses due
generally to merit increases, increased federal deposit insurance premiums, and loan collection expenses.




Taxes.  Taxes increased to $1.1 million for the six months ended September 30, 2009, from $771,000 for the six months ended September 30, 2008. The effective tax rate increased to 37.9% for the September 30, 2008 period from 33.5% for the same period ended
September 30, 2008.


23


OFF BALANCE SHEET ARRANGEMENTS




There has not been a significant change in our off balance sheet arrangements from the information reported in our annual 10-K for the period ended March 31, 2009.






CONTRACTUAL OBLIGATIONS




There has not been a significant change in our contractual obligations from the information reported in our annual 10-K for the period ended March 31, 2009.







RECENT ACCOUNTING PRONOUNCEMENTS





In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141(R), “Business Combinations” (SFAS 141(R)) (ASC 805 Business Combinations). The Standard significantly changed the financial accounting and reporting of business combination transactions.  SFAS 141(R) establishes
principles for how an acquirer recognizes and measures the identifiable assets acquired, liabilities assumed, and any noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  SFAS 141(R) is effective for acquisition dates on or after the beginning
of an entity’s first year that begins after December 15, 2008.  The Company does not expect the implementation of SFAS 141(R) to have a material impact on its consolidated financial statements, at this time.





In April 2009, the FASB issued FSP FAS 141(R)-1, “Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies” (ASC 805 Business Combinations).  FSP FAS 141(R)-1 amends and clarifies SFAS 141(R) to address application issues on initial recognition
and measurement, subsequent measurement and accounting, and disclosure of assets and liabilities arising from contingencies in a business combination.  The FSP is effective for assets and liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company does not expect the adoption of FSP FAS 141(R)-1 to have a material impact on its consolidated
financial statements.





In April 2009, the FASB issued FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” (ASC 820 Fair Value Measurements and Disclosures). FSP FAS 157-4 provides additional guidance
for estimating fair value in accordance with SFAS 157 when the volume and level of activity for the asset or liability have significantly decreased.  The FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.  FSP FAS 157-4 is effective for interim and annual periods ending after June 15, 2009, and shall be applied prospectively.  Earlier adoption is permitted for periods ending after March 15, 2009.  The Company adopted FSP
FAS 157-4 for interim and annual periods after June 15, 2009. The Company does not expect the adoption of FSP FAS 157-4 to have a material impact on its consolidated financial statements.





In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (ASC 825 Financial Instruments and ASC 270 Interim Reporting).  FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments,”
to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  In addition, the FSP amends APB Opinion No. 28, “Interim Financial Reporting,” to require those disclosures in summarized financial information at interim reporting periods.  The FSP is effective for interim periods ending after June 15, 2009, with


24


earlier adoption permitted for periods ending after March 15, 2009.  The Company adopted FSP FAS 107-4 and APB 28-1 for interim and annual periods after June 15, 2009. The Company does not expect the adoption of FSP FAS 107-1 and APB 28-1 to have a material impact on its consolidated financial statements.





In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” (ASC 320 Investments – Debt and Equity Securities).  FSP FAS 115-2 and FAS 124-2 amends other-than-temporary impairment guidance for debt securities to make guidance
more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities.  The FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities.  FSP FAS 115-2 and FAS 124-2 is effective for interim and annual periods ending after June 15, 2009, with earlier adoption permitted for periods ending after March 15, 2009.  The Company adopted FSP FAS 115-2 and FAS
124-2 for interim and annual periods after June 15, 2009. The Company does not expect the adoption of FSP FAS 115-2 and FAS 124-2 to have a material impact on its (consolidated) financial statements.





In April 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 111 (SAB 111).  SAB 111 amends and replaces SAB Topic 5.M. in the SAB Series entitled “Other Than Temporary Impairment of Certain Investments in Debt and Equity Securities.”  SAB 111 maintains the
SEC Staff’s previous views related to equity securities and amends Topic 5.M. to exclude debt securities from its scope.  The Company does not expect the implementation of SAB 111 to have a material impact on its consolidated financial statements.





In May 2009, the FASB issued Statement of Financial Accounting Standards No. 165, “Subsequent Events” (ASC 855 Subsequent Events).  SFAS 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued
or are available to be issued. SFAS 165 is effective for interim and annual periods ending after June 15, 2009. The Company does not expect the adoption of SFAS 165 to have a material impact on its consolidated financial statements.





In June 2009, the FASB issued Statement of Financial Accounting Standards No. 166, “Accounting for Transfers of Financial Assets – an amendment of FASB Statement No. 140” (ASC 860 Transfers and Servicing).  SFAS 166 provides guidance to improve the relevance, representational faithfulness,
and comparability of the information that a report entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS 166 is effective for interim and annual periods beginning after November 15, 2009.  The Company does not expect the adoption of SFAS 166 to have a material impact on its consolidated financial
statements.





In June 2009, the FASB issued Statement of Financial Accounting Standards No. 167, “Amendments to FASB Interpretation No. 46(R)” (ASC 810 Consolidation). SFAS 167 improves financial reporting by enterprises involved with variable interest entities.  SFAS 167 is effective for interim and annual periods
beginning after November 15, 2009.   Early adoption is prohibited. The Company does not expect the adoption of SFAS 167 to have a material impact on its consolidated financial statements.





In June 2009, the FASB issued Statement of Financial Accounting Standards No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles – replacement of FASB Statement No. 162” (ASC 105 Generally Accepted Accounting Principles).  SFAS
168 establishes the FASB Accounting Standards Codification which will become the source of authoritative U.S. generally accepted accounting principles (ASC) recognized by the FASB to be applied by nongovernmental entities.  SFAS 168 is effective immediately. The Company does not expect the


25


adoption of SFAS 168 to have a material impact on its consolidated financial statements.





In June 2009, the FASB issued EITF Issue No. 09-1, “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing” (ASC 470 Debt).  EITF Issue No. 09-1 clarifies how an entity should account for an own-share lending arrangement that is entered into
in contemplation of a convertible debt offering.  EITF Issue No. 09-1 is effective for arrangements entered into on or after June 15, 2009. Early adoption is prohibited.  The Company does not expect the adoption of EITF Issue No. 09-1 to have a material impact on its consolidated financial statements.





In June 2009, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 112 (SAB 112). SAB 112 revises or rescinds portions of the interpretative guidance included in the codification of SABs in order to make the interpretive guidance consistent with current U.S. GAAP.  The Company does not
expect the adoption of SAB 112 to have a material impact on its consolidated financial statements.





In August 2009, the FASB issued Accounting Standards Update No. 2009-05 (ASU 2009-05), “Fair Value Measurements and Disclosures (Topic 820) – Measuring Liabilities at Fair Value.” ASU 2009-05 amends Subtopic 820-10, “Fair Value Measurements and Disclosures – Overall,” and provides clarification
for the fair value measurement of liabilities. ASU 2009-05 is effective for the first reporting period including interim period beginning after issuance.  The Company does not expect the adoption of ASU 2009-05 to have a material impact on its consolidated financial statements.





In September 2009, the FASB issued Accounting Standards Update No. 2009-12 (ASU 2009-12), “Fair Value Measurements and Disclosures (Topic 820): Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” ASU 2009-12 provides guidance on estimating the fair value of alternative
investments. ASU 2009-12 is effective for interim and annual periods ending after December 15, 2009. The Company does not expect the adoption of ASU 2009-12 to have a material impact on its consolidated financial statements.





In October 2009, the FASB issued Accounting Standards Update No. 2009-15 (ASU 2009-15), “Accounting for Own-Share Lending Arrangements in Contemplation of Convertible Debt Issuance or Other Financing.” ASU 2009-15 amends Subtopic 470-20 to expand accounting and reporting guidance for own-share lending arrangements
issued in contemplation of convertible debt issuance. ASU 2009-15 is effective for fiscal years beginning on or after December 15, 2009 and interim periods within those fiscal years for arrangements outstanding as of the beginning of those fiscal years. The Company does not expect the adoption of ASU 2009-15 to have a material impact on its consolidated financial statements.





In October 2009, the Securities and Exchange Commission issued Release No. 33-99072, “Internal Control over Financial Reporting in Exchange Act Periodic Reports of Non-Accelerated Filers.” Release No. 33-99072 delays the requirement for non-accelerated filers to include an attestation report of their independent
auditor on internal control over financial reporting with their annual report until the fiscal year ending on or after June 15, 2010.







Disclosure Regarding Forward-Looking Statements




This document, including information incorporated by reference, contains, and future filings by Community Financial Corporation on Form 10-K, Form 10-Q and Form 8-K and future oral and written statements by Community Financial Corporation and its management may contain, forward-looking statements about Community Financial
Corporation which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, including




26




revenue creation, lending origination, operating efficiencies, loan sales, charge-offs and loan loss provisions, growth opportunities, interest rates, acquisition and divestiture opportunities, and synergies, efficiencies, cost savings and funding advantages. These forward-looking statements are based on currently available
competitive, financial and economic data and management's views and assumptions regarding future events. These forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Accordingly, Community Financial Corporation cautions readers not to place undue reliance on any forward-looking statements.




Many of these forward-looking statements appear in this document in Management's Discussion and Analysis. Words such as may, could, should, would, believe, anticipate, estimate, expect, intend, plan and similar expressions are intended to identify these forward-looking statements. The important factors discussed below,
as well as other factors discussed elsewhere in this document and factors identified in our filings with the Securities and Exchange Commission and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document. Among the factors that could cause our actual results to differ from these forward-looking statements are:




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




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




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




·
the accuracy of our estimates in evaluating our allowance for loan losses or determining the fair value of our securities;




·
the timely development of and acceptance of new products and services of Community Financial Corporation and Community Bank, and the perceived overall value of these products and services by users, including the features, pricing and quality compared to competitors' products and services;




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




·
the impact of technological changes;




·
changes in consumer spending and saving habits; and




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










27


ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK





There have been no material changes in market risk since March 31, 2009 year end. Market risk is discussed as part of management’s discussion and analysis under asset/liability management in the Company’s annual report for March 31, 2009.





ITEM 4T.  CONTROLS AND PROCEDURES




An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of September 30, 2009, was carried out under the supervision and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members
of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of September 30, 2009, were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and forms. In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended September 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.




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





28


PART II.  OTHER INFORMATION





Item 1.  Legal Proceedings





Not Applicable.





Item 1A.  Risk Factors





Not required for smaller reporting company





Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds





Not Applicable.





Item 3.  Defaults Upon Senior Securities





Not Applicable.





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





The Company held an annual meeting of stockholders on July 29, 2009. The following directors were elected for a three year term at the meeting: James R. Cooke, Jr. D.D. S., P. Douglas Richard and Morgan N. Trimyer.  Norman C. Smiley III was elected for a one year
term. The following directors’ term of office continued after the meeting: Dale C. Smith, Charles W. Fairchilds and Charles F. Andersen.





At the annual meeting the following directors were elected.





For

WithheldJames R. Cooke, Jr. D.D. S

3,627,960

122,679P. Douglas Richard

3,631,011

119,628Morgan N. Trimyer

3,644,206

106,433Norman C. Smiley III

3,644,206

106,433





An advisory (nonbinding) executive compensation resolution was approved at the annual meeting.





For
Against
WithheldExecutive Compensation resolution
3,423,882
116,632
206,026








Item 5.  Other Information





Not Applicable.





Item 6.  Exhibits





See Exhibit Index


29





SIGNATURES





Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





COMMUNITY FINANCIAL CORPORATIONDate: November 12, 2009
By:
/s/ R. Jerry GilesR. Jerry Giles
Chief Financial Officer
(Duly Authorized Officer)











30





EXHIBIT INDEX




Exhibit Number

Document3.1

Amended and Restated Articles of Incorporation, filed on July 5, 1996 as an exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No. 000-18265), are incorporated herein by reference.3.2

Certificate of Amendment and Articles of Amendment for the Series A Preferred Stock, filed on December 22, 2008, as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.3.3

Bylaws, as amended and restated, filed on December 20, 2007 as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.4.1

Registrant’s Specimen Common Stock Certificate, filed on June 29, 1999 as Exhibit 4 to the Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 1999, is incorporated herein by reference.4.2

Registrant’s Form of Certificate for the Series A Preferred Stock, filed on December 22, 2008, as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.4.3

Registrant’s Form of Warrant for Purchase of Shares of Common Stock, filed on December 22, 2008, as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.1

Amended and Restated Employment Agreement by and between Community Bank and P. Douglas Richard, filed on May 5, 2006, as Exhibit 99.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.2

Form of Change in Control Agreement by and between Community Financial Corporation and  P. Douglas Richard, filed on May 5, 2006 as Exhibit 99.4 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.3

Registrant’s 1996 Incentive Plan, filed on July 5, 1996 as an exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No. 000-18265), is incorporated herein by reference.10.4

Form of Change in Control Agreement by and between Community Financial Corporation and each of R. Jerry Giles and Benny N. Werner, filed on May 5, 2006 as Exhibit 99.5 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.5

Retirement Agreements by and between Community Bank and Non-Employee Directors filed on June 29, 2004 as an exhibit to the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 2004, and incorporated here by reference.10.6

Form of First Amendment to the Retirement Agreements by and between Community Bank and Non-Employee Directors, filed on June 29, 2005 as an exhibit to the Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for the fiscal year ended March 31, 2005, is incorporated here by reference.
















10.7

Salary Continuation Agreements by and between Community Bank and Officers Richard, Giles, Smiley and Werner filed on June 29, 2004 as an exhibit to the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 2004, and incorporated herein by reference.10.8

Form of Director Deferred Fee Agreement, as amended, filed on June 29, 2005 as an exhibit to the Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for the fiscal year ended March 31, 2005, is incorporated herein by reference.10.9

Registrant’s 2003 Stock Option and Incentive Plan, filed on December 27, 2003 as an exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No. 000-18265), is incorporated herein by reference.10.10

Form of Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement for Registrant’s 2003 Stock Option and Incentive Plan, filed on August 12, 2005 as an exhibit to the Registrant’s Quarterly Report on Form 10-Q (SEC File No. 000-18265) for the quarter ended June 30, 2005, are incorporated herein
by reference.10.11

Employment Agreement by and between Community Bank and Norman C. Smiley, III, filed on June 16, 2008 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.12

Change in Control Agreement by and between Community Financial Corporation and Norman C. Smiley, III, filed on June 16, 2008 as an exhibit to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.13

Form of Change in Control Agreement by and between Community Financial Corporation and Lyle Moffett, filed on July 1, 2008 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.14

Form of Change in Control Agreement by and between Community Financial Corporation and John Howerton, filed on November 14, 2008 as an exhibit to the Registrant’s Report on Form 10-Q (SEC File No. 000-18265), is incorporated herein by reference.10.15

Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated December 19, 2008, between Community Financial Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Warrant, filed on December 22, 2008, as Exhibit 10.1 to the
Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.16

Form of Compensation Modification Agreement and Waiver, executed by  P. Douglas Richard and Norman C. Smiley, III, filed on December 22, 2008, as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.10.17

Separation Agreement and Release between the Registrant, and its wholly owned subsidiary, Community Bank, and Chris P. Kyriakides, filed on May 26, 2009 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.11

Statement re computation of per share earnings (see Note 3 of the Notes to Unaudited Interim Consolidated Financial Statements included in this Current Report on Form 10-Q).31.1

Rule 13(a)-14(a) Certification (Chief Executive Officer)31.2

Rule 13(a)-14(a) Certification (Chief Financial Officer)32

Section 1350 Certifications