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    December 31,
2008.





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





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       Small
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 January 31, 2009:4,361,658.












COMMUNITY
FINANCIAL CORPORATION








INDEX








PART
      I.
              FINANCIAL
      INFORMATIONItem
      1.
              Consolidated
      Financial StatementsConsolidated
      Balance Sheets at December 31, 2008 (unaudited)
                and
      March 31, 2008
              3Consolidated
      Statements of Operations for the
                Three
      and Nine Months Ended December 31, 2008 and 2007
                (unaudited)
              4Consolidated
      Statements of Cash Flows for the
                Nine
      Months Ended December 31, 2008 and 2007(Unaudited)
              5Notes
      to Unaudited Interim Consolidated
                Financial
      Statements
              6Item
      2.
              Management's
      Discussion and Analysis of Financial Condition
                and
      Results of Operations
              12Item
      3.
              Quantitative
      and Qualitative Disclosures About Market Risk
              20Item
      4T.
              Controls
      and Procedures
              23PART
      II.
              OTHER
      INFORMATION
              24Signature
      Page
              
              25Exhibit
      Index
              
              26




















Part I.
Financial Information


Item 1.
Financial Statements





COMMUNITY
      FINANCIAL CORPORATIONCONSOLIDATED
      BALANCE SHEETSDecember
      31,
                
                
                March
      31,2008
                
                
                2008(Unaudited)ASSETSCash
      (including interest-bearing deposits of
                  approximately
      $1,545,955 and $12,762,079)
                
                $
                6,082,233
                
                
                $
                15,998,041SecuritiesHeld
      to maturity
                
                
                2,250,020
                
                
                
                2,940,217Available
      for sale, at fair value
                
                
                207,307
                
                
                
                9,562,410Restricted
      investment in Federal
                  Home
      Loan Bank stock, at cost
                
                
                5,390,800
                
                
                
                5,210,800Loans
      receivable, net of allowance for loan
                  losses
      of $3,651,879 and $3,214,771
                
                
                468,807,707
                
                
                
                437,173,797Real
      estate owned and repossessed assets
                
                
                1,448,452
                
                
                
                592,609Property
      and equipment, net
                
                
                8,394,629
                
                
                
                7,923,481Accrued
      interest receivableLoans
                
                
                1,978,791
                
                
                
                1,953,550Investments
                
                
                24,330
                
                
                
                125,523Prepaid
      expenses and other assets
                
                
                13,338,345
                
                
                
                9,765,345Total
      Assets
                
                $
                507,922,614
                
                
                $
                491,245,773LIABILITIES
      AND STOCKHOLDERS’ EQUITYLiabilitiesDeposits
                
                $
                357,403,112
                
                
                $
                350,730,834Borrowings
                
                
                99,000,000
                
                
                
                96,000,000Securities
      sold under agreement to repurchase
                
                
                1,828,753
                
                
                
                2,834,412Advance
      payments by borrowers for
                  taxes
      and insurance
                
                
                111,132
                
                
                
                150,545Other
      liabilities
                
                
                2,602,222
                
                
                
                2,825,279Total
      Liabilities
                
                
                460,945,219
                
                
                
                452,541,070Stockholders’
      EquityPreferred
      stock $.01 par value, authorized 3,000,000shares,
      12,643 shares outstanding
                
                
                12,643,000
                
                
                
                ---Common
      stock, $0.01 par value, authorized
                  10,000,000
      shares, 4,361,658 and 4,335,958
                  shares outstanding
                
                
                43,617
                
                
                
                43,360Warrants
                
                
                603,153
                
                
                
                ---Discount
      on preferred
                
                
                (599,132
                )
                
                
                ---Additional
      paid in capital
                
                
                5,562,732
                
                
                
                5,391,704Retained
      earnings
                
                
                29,093,285
                
                
                
                34,992,515Accumulated
      other comprehensive
                  (loss)
                
                
                (369,260
                )
                
                
                (1,722,876
                )Total
      Stockholders’ Equity
                
                
                46,977,395
                
                
                
                38,704,703Total
      Liabilities and Stockholders’ Equity
                
                $
                507,922,614
                
                
                $
                491,245,773





See
accompanying notes to unaudited interim consolidated financial
statements.


3


COMMUNITY
      FINANCIAL CORPORATION
                  CONSOLIDATED
      STATEMENTS OF OPERATIONSThree
      Months Ended
                  December 31,
                
                
                Nine
      Months Ended
                  December 31,2008
                
                
                2007
                
                
                2008
                
                
                2007(Unaudited)
                
                
                (Unaudited)INTEREST
      INCOMELoans
                
                $
                7,001,975
                
                
                $
                7,562,839
                
                
                $
                21,340,801
                
                
                $
                22,730,883Investment
      securities
                
                
                29,005
                
                
                
                232,144
                
                
                
                96,025
                
                
                
                712,500Other
                
                
                21,816
                
                
                
                291,785
                
                
                
                437,999
                
                
                
                885,518Total
      interest income
                
                
                7,052,796
                
                
                
                8,086,768
                
                
                
                21,874,825
                
                
                
                24,328,901INTEREST
      EXPENSEDeposits
                
                
                2,581,964
                
                
                
                3,223,827
                
                
                
                8,075,755
                
                
                
                9,273,818Borrowed
      money
                
                
                429,895
                
                
                
                1,207,798
                
                
                
                1,717,759
                
                
                
                3,751,701Total
      interest expense
                
                
                3,011,858
                
                
                
                4,431,625
                
                
                
                9,793,514
                
                
                
                13,025,519NET
      INTEREST INCOME
                
                
                4,040,938
                
                
                
                3,655,143
                
                
                
                12,081,311
                
                
                
                11,303,382PROVISION
      FOR LOAN LOSSES
                
                
                893,684
                
                
                
                102,586
                
                
                
                1,646,225
                
                
                
                455,287NET
      INTEREST INCOME AFTER
                  PROVISION
      FOR LOAN LOSSES
                
                
                3,147,254
                
                
                
                3,552,557
                
                
                
                10,435,086
                
                
                
                10,848,095NONINTEREST
      INCOME (LOSS)Service
      charges, fees and commissions
                
                
                799,919
                
                
                
                812,737
                
                
                
                2,297,656
                
                
                
                2,279,289Other
                
                
                97,460
                
                
                
                103,967
                
                
                
                288,309
                
                
                
                323,188Securities
      impairment
                
                
                (482,368
                )
                
                
                ---
                
                
                
                (11,535,709
                )
                
                
                ---Total
      noninterest income (loss)
                
                
                415,011
                
                
                
                916,704
                
                
                
                (8,949,744
                )
                
                
                2,602,477NONINTEREST
      EXPENSECompensation
      & benefits
                
                
                2,061,308
                
                
                
                1,884,810
                
                
                
                5,990,212
                
                
                
                5,540,737Occupancy
                
                
                392,023
                
                
                
                360,347
                
                
                
                1,128,087
                
                
                
                1,074,810Data
      processing
                
                
                359,482
                
                
                
                352,370
                
                
                
                1,053,513
                
                
                
                1,046,439Federal
      insurance premium
                
                
                57,798
                
                
                
                9,634
                
                
                
                227,643
                
                
                
                28,959Advertising
                
                
                135,840
                
                
                
                128,891
                
                
                
                343,364
                
                
                
                348,299Other
                
                
                520,128
                
                
                
                372,664
                
                
                
                1,460,156
                
                
                
                1,227,128Total
      noninterest expense
                
                
                3,526,579
                
                
                
                3,108,716
                
                
                
                10,202,975
                
                
                
                9,266,372INCOME
      (LOSS) BEFORE TAXES
                
                
                35,686
                
                
                
                1,360,545
                
                
                
                (8,717,633
                )
                
                
                4,184,200INCOME
      TAX (BENEFIT) EXPENSE
                
                
                (4,203,338
                )
                
                
                436,795
                
                
                
                (3,431,877
                )
                
                
                1,354,640NET
      INCOME (LOSS)
                
                $
                4,239,024
                
                
                $
                923,750
                
                
                $
                (5,285,756
                )
                
                $
                2,829,560Effective
      dividend on preferred  stock
                
                $
                4,021
                
                
                $
                ---
                
                
                $
                4,021
                
                
                $
                ---NET
      INCOME AVAILABLE TO COMMON
                  STOCKHOLDERS
                
                $
                4,235,003
                
                
                $
                923,750
                
                
                $
                (5,289,777
                )
                
                $
                2,829,560BASIC
      EARNINGS (LOSS) PER SHARE
                
                $
                0.97
                
                
                $
                0.21
                
                
                $
                (1.21
                )
                
                $
                0.66DILUTED
      EARNINGS (LOSS) PER SHARE
                
                $
                0.97
                
                
                $
                0.21
                
                
                $
                (1.21
                )
                
                $
                0.64DIVIDENDS
      PER COMMON SHARE
                
                $
                0.00
                
                
                $
                0.065
                
                
                $
                0.13
                
                
                $
                0.195


See
accompanying notes to unaudited interim consolidated financial
statements.






4






COMMUNITY
      FINANCIAL CORPORATIONCONSOLIDATED
      STATEMENTS OF CASH FLOWSNine
      Months EndedDecember
      312008
                
                
                2007(Unaudited)
                
                
                (Unaudited)OPERATING
      ACTIVITIESNet
      income (loss)
                
                $
                (5,285,756
                )
                
                $
                2,829,560Adjustments
      to reconcile net income (loss) tonet
      cash provided by operating activitiesProvision
      for loan losses
                
                
                1,646,225
                
                
                
                455,287Depreciation
                
                
                434,304
                
                
                
                463,538Stock-based
      compensation expense
                
                
                6,826
                
                
                
                ---Amortization
      of premium and accretionof
      discount on securities, net
                
                
                197
                
                
                
                5,277Securities
      impairment
                
                
                11,535,709
                
                
                
                ---Decrease
      in net deferred loan costs
                
                
                151,789
                
                
                
                37,879(Increase)
      in deferred income tax assets
                
                
                (4,522,992
                )
                
                
                (120,243
                )Decrease(increase)
      in other assets
                
                
                96,048
                
                
                
                (2,808,208
                )(Decrease)
      increase in other liabilities
                
                
                (4,153
                )
                
                
                989,470Net
      cash provided by operating activities
                
                
                4,058,197
                
                
                
                1,852,560INVESTING
      ACTIVITIESProceeds
      from maturities of held to maturity securities
                
                
                2,790,000
                
                
                
                ---Purchase
      of held to maturity securities
                
                
                (2,100,000
                )
                
                
                1,917,143Net
      increase in loans
                
                
                (33,391,277
                )
                
                
                (28,587,615
                )Purchases
      of property and equipment
                
                
                (887,641
                )
                
                
                (201,244
                )(Purchase)
      of FHLB stock
                
                
                (180,000
                )
                
                
                (720,000
                )(Increase)
      in repossessed assets and real estate owned
                
                
                (1,118,394
                )
                
                
                (153,367
                )Net
      cash absorbed by investing activities
                
                
                (34,887,312
                )
                
                
                (27,745,083
                )FINANCING
      ACTIVITIESDividends
      paid
                
                
                (565,813
                )
                
                
                (837,957
                )Net
      increase in deposits
                
                
                6,672,278
                
                
                
                12,004,640Proceeds
      from advances and other borrowed money
                
                
                1,994,341
                
                
                
                15,691,955Proceeds
      from issuance of common stock
                
                
                169,501
                
                
                
                107,285Proceeds
      from issuance of preferred stock
                
                
                12,643,000
                
                
                
                ---Net
      cash provided by financing activities
                
                
                20,913,307
                
                
                
                26,965,963(DECREASE)
      INCREASE IN CASH AND CASH EQUIVALENTS
                
                
                (9,915,808
                )
                
                
                1,073,440CASH
      AND CASH EQUIVALENTS – beginning of period
                
                
                15,998,041
                
                
                
                3,625,796CASH
      AND CASH EQUIVALENTS – end of period
                
                $
                6,082,233
                
                
                $
                4,699,236See
      accompanying notes to unaudited interim consolidated financial
      statements






5





COMMUNITY
FINANCIAL CORPORATION


NOTES TO
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS


DECEMBER
31, 2008





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 nine months ended December 31, 2008 are not necessarily indicative of
the results that may be expected for the year ending March 31,
2009.





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 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.





NOTE
2. - STOCK-BASED COMPENSATION PLAN




In
December 2004, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment”
(SFAS 123R). SFAS 123R requires companies to recognize 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 and eliminates the choice to account for employee stock options
under Accounting Principles Board Opinion No. 25, “Accounting for Stock
Issued to Employees” (APB 25). The Company adopted SFAS 123R effective April 1,
2006 using the modified prospective method and as such, results for prior
periods have not been restated.




Stock
options of 5,000 shares were granted and $6,826 of stock-based compensation
expense was recognized during the nine month periods ended December 31,
2008.  There were no stock options granted and no stock-based
compensation expense was recognized during the three and nine month periods
ended December 31, 2007 and the three month period ended December 31,
2008.




The
following summarizes the stock option activity for the nine months ended
December 31, 2008:





Weighted
              
              IntrinsicWeighted
              
              
              Average
              
              Value
      ofAverage
              
              
              Remaining
              
              UnexercisedExercise
              
              
              Contractual
              
              In-the-MoneyShares
              
              
              Price
              
              
              Term
              
              OptionsOptions
      outstanding, March 31, 2008
              
              
              429,600
              
              
              $
              8.28Granted
              
              
              5,000
              
              
              $
              5.71Exercised
              
              
              (24,700
              )
              
              $
              6.86Forfeited
              
              
              (29,100
              )
              
              $
              7.36Options
      outstanding, December 31, 2008
              
              
              380,200
              
              
              $
              8.41
              
              
              
              4.5Options
      exercisable, December 31, 2008
              
              
              380,200
              
              
              $
              8.41
              
              
              
              4.5
              
              0




The total
intrinsic value of in-the-money options exercised during the nine months ended
December 31, 2008 was $370.







6








NOTE
3. - EARNINGS PER SHARE





Basic
earnings per share is based on net income 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 earnings 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 EndedDecember 31, 2008
              
              
              December 31, 2007Weighted
      Average
              
              
              Per
      Share
              
              
              
              
              
              Weighted
      Average
              
              
              Per
      ShareIncome
              
              
              Shares
              
              
              Amount
              
              
              Income
              
              
              Shares
              
              
              AmountBasic
      earnings (loss) per shareIncome
      (loss) available to
                common
      stockholders
              
              $
              4,235,003
              
              
              
              4,361,658
              
              
              $
              0.97
              
              
              $
              923,750
              
              
              
              4,304,882
              
              
              $
              0.21Effect
      of Dilutive SecuritiesOptions
      and Warrants
              
              
              ---
              
              
              
              4,100
              
              
              
              
              
              
              
              ---
              
              
              
              84,450Diluted
      earnings (loss) per shareIncome
      (loss) available to
                common
      stockholders
              
              $
              4,235,003
              
              
              
              4,365,758
              
              
              $
              0.97
              
              
              $
              923,750
              
              
              
              4,389,332
              
              
              $
              0.21







During
the quarter ended December 31, 2008, 292,000 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 December 31, 2007, options
representing 114,000 shares were not included in the calculation of earnings per
share because they would have been anti-dilutive.






7







For
      the Nine Months EndedDecember 31, 2008
              
              
              December 31, 2007Weighted
      Average
              
              
              Per
      Share
              
              
              
              
              
              Weighted
      Average
              
              
              Per
      Share(Loss)
              
              
              Shares
              
              
              Amout
              
              
              Income
              
              
              Shares
              
              
              AmountBasic
      earnings (loss) per shareIncome
      (loss) available to
                common
      stockholders
              
              $
              (5,289,777
              )
              
              
              4,354,028
              
              
              $
              (1.21
              )
              
              $
              2,829,560
              
              
              
              4,299,257
              
              
              $
              0.66Effect
      of Dilutive SecuritiesOptions
      and Warrants
              
              
              ---
              
              
              
              ---
              
              
              
              
              
              
              
              ---
              
              
              
              103,461Diluted
      earnings (loss) per shareIncome
      (loss) available to
                common
      stockholders
              
              $
              (5,289,777
              )
              
              
              4,354,028
              
              
              $
              (1.21
              )
              
              $
              2,829,560
              
              
              
              4,402,718
              
              
              $
              0.64







NOTE
4. - STOCKHOLDERS' EQUITY





The
following table presents the Bank's regulatory capital levels at December 31,
2008:





Amount
                  Required
                
                
                Percent
                  Required
                
                
                Actual
                  Amount
                
                
                Actual
                  Percent
                
                
                Excess
                  AmountTangible
      Capital
                
                $
                7,655,000
                
                
                
                1.50
                %
                
                $
                47,286,000
                
                
                
                9.27
                %
                
                $
                39,631,000Core
      Capital
                
                
                20,413,000
                
                
                
                4.00
                
                
                
                47,286,000
                
                
                
                9.27
                
                
                
                26,873,000Risk-based
      Capital
                
                
                35,136,000
                
                
                
                8.00
                
                
                
                50,912,000
                
                
                
                11.59
                
                
                
                15,776,000





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 nine months ended December 31, 2008 and 2007 was
$10,478,874 and $12,694,780, respectively. Total income taxes paid for the nine
months ended December 31, 2008 and 2007 was $1,195,756 and
$1,474,213.








8








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 and unrealized gains
and losses on securities available for sale. The following tables set forth the
components of comprehensive income for the nine-month periods ended December 31,
2008 and 2007:





Nine
      Months Ended December 312008
              
              
              2007Net
      Income (Loss)
              
              $
              (5,285,756
              )
              
              $
              2,829,560Other
      comprehensive income (loss), net of tax:Unrealized
      holding (losses) on available for sale securities
                arising
      during the period, net of deferred tax of $3,553,934
              
              
              (5,798,524
              )
              
              
              (2,523,134
              )Adjustments
      for realized securities losses, net of tax of
              
              
              7,152,140
              
              
              
              ---Total
      other comprehensive income (loss), net of tax
              
              
              1,353,616
              
              
              
              (2,523,134
              )Total
      comprehensive income (loss)
              
              $
              (3,932,140
              )
              
              $
              306,426








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 EndedDecember
      312008
              
              
              2007Service
      cost
              
              $
              87,669
              
              
              $
              77,336Interest
      cost
              
              
              53,010
              
              
              
              44,055Expected
      return on plan assets
              
              
              (64,175
              )
              
              
              (43,935
              )Recognized
      net actuarial loss
              
              
              4,888
              
              
              
              6,608$
              81,392
              
              
              $
              84,064











9











Nine
      Months EndedDecember
      312008
              
              
              2007Service
      cost
              
              $
              263,007
              
              
              $
              232,008Interest
      cost
              
              
              159,030
              
              
              
              132,165Expected
      return on plan assets
              
              
              (192,525
              )
              
              
              (131,805
              )Recognized
      net actuarial loss
              
              
              14,664
              
              
              
              19,824$
              244,176
              
              
              $
              252,192







The
Company has been advised by its actuary that a contribution is not required for
the year ending March 31, 2009 due to the level of contributions in the prior
fiscal year.  The Company anticipates that a contribution will not be
made for the fiscal year ending March 31, 2009.








NOTE
8. – SECURITIES





At
December 31, 2008, 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) the intent and ability
of the Company to retain its investment in the issuer for a period of time
sufficient to allow for any anticipated recovery in fair value.







NOTE 9 - FAIR VALUE
MEASUREMENTS




SFAS No. 157,Fair Value
Measurements, defines fair
value, establishes a framework for measuring fair value, establishes a
three-level valuation hierarchy for disclosure of fair value measurement and
enhances 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.









10







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.




Impaired
loans




SFAS No. 157 applies to loans measured
for impairment using the practical expedients permitted by SFAS No. 114,Accounting by
Creditors for Impairment of a Loan, 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 collateral, is determined by
appraisals or independent valuation which is then adjusted for the cost related
to liquidation of the collateral.




Other real
estate owned




Certain assets such as other real estate
owned (OREO) are measured atthe lesser of cost andfair value less cost to sell. We believe
that the fair value component in its valuation follows the provisions of SFAS
No. 157.








10. Loans
      Receivable, NetLoans
      receivable are summarized as follows:December
      31, 2008
                                                                          
                                                                          
                                                                          March
      31, 2008Residential
      real estate
                                                                          
                                                                          $
                                                                          140,556,121
                                                                          
                                                                          
                                                                          $
                                                                          122,604,826Commercial
      real estate
                                                                          
                                                                          
                                                                          151,525,991
                                                                          
                                                                          
                                                                          
                                                                          150,059,098Construction
                                                                          
                                                                          
                                                                          63,233,016
                                                                          
                                                                          
                                                                          
                                                                          53,891,019Commercial
      business
                                                                          
                                                                          
                                                                          45,724,627
                                                                          
                                                                          
                                                                          
                                                                          41,577,858Consumer
                                                                          
                                                                          
                                                                          85,308,837
                                                                          
                                                                          
                                                                          
                                                                          84,671,436486,348,592
                                                                          
                                                                          
                                                                          
                                                                          452,804,237Less:Loans in process
                                                                          
                                                                          
                                                                          14,920,922
                                                                          
                                                                          
                                                                          
                                                                          13,599,373Deferred loan (costs),
      net
                                                                          
                                                                          
                                                                          (1,031,916
                                                                          )
                                                                          
                                                                          
                                                                          (1,183,704
                                                                          )Allowance for loan
      losses
                                                                          
                                                                          
                                                                          3,651,879
                                                                          
                                                                          
                                                                          
                                                                          3,214,77117,540,885
                                                                          
                                                                          
                                                                          
                                                                          15,630,440$
                                                                          468,807,707
                                                                          
                                                                          
                                                                          $
                                                                          437,173,797





Loans
serviced for others amounted to approximately $304,693 at December 31, 2008, and
$390,094 at


March 31,
2008.  The loans are not included in the accompanying consolidated
balance sheets.





Year
      Ended
                                                  
                                                  December
      31, 2008
                                                  
                                                  
                                                  March
      31, 2008Balance
      at beginning of year
                                                  
                                                  $
                                                  3,214,771
                                                  
                                                  
                                                  $
                                                  3,078,397Provision
      for loan loss
                                                  
                                                  
                                                  1,646,225
                                                  
                                                  
                                                  
                                                  624,717Loans
      charged-off
                                                  
                                                  
                                                  (1,324,272
                                                  )
                                                  
                                                  
                                                  (623,055
                                                  )Recoveries
      of loans previously charged-off
                                                  
                                                  
                                                  115,155
                                                  
                                                  
                                                  
                                                  134,712Balance
      at end of year
                                                  
                                                  $
                                                  3,651,879
                                                  
                                                  
                                                  $
                                                  3,214,771






11







Impaired
loans without a valuation allowance totaled $26,028 as of December 31, 2008, and
$47,768 as of
March 31, 2008.





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 $3,406,959 at
      December 31, 2008 and $1,026,298 at March 31, 2008.  If interest
      on these loans had been accrued, such income would have approximately
      $116,157 for the nine months ended December 31, 2008 and $44,880 for the
      year ended March 31, 2008.

























12


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 (loss) for the nine months ended December 31, 2008 decreased $8,116,000
to ($5.3) million compared to $2.8 million for the nine months ended December
31, 2007.  Net income for the nine months decreased due primarily to
an Other Than Temporary Impairment (OTTI) adjustment on our Freddie Mac and
Fannie Mae Available for Sale securities of $11,536,000 (net of tax benefit of
$4,384,000). Net income for the nine months ended December 31, 2008 was also
affected by an increase in the provision for loan losses, an increase in
noninterest expense, partially offset by an increase in net interest
income.





Net
income for the three months ended December 31, 2008 increased $3,315,000 or 359%
to $4.2 million compared to $924,000 for the three months ended December 31,
2007.  Net income for the quarter ended December 31, 2008 increased
due primarily to the tax benefit of $4,384,000 for the Other Than Temporary
Impairment charge on our Freddie Mac and Fannie Mae Available for Sale
securities of $11,053,000 recognized in September 2008 and $482,000 in the
December 31, 2008 quarter and an increase in net interest income, offset by an
increase in the provision for loan loss and increases in noninterest
expense.





Net
interest income for the quarter ended December 31, 2008 increased $386,000, or
10.6%, to $4,041,000 compared to the quarter ended December 31, 2007. 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 factor contributing to the increase in
net interest income for the quarter ended December 31, 2008 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 or reduction 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 of investment securities during the three months
ended December 31, 2008 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 $328.7 million in adjustable rate loans or
70.1% 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.





Funding
for the growth in interest-earning assets combined with a falling interest rate
environment has impacted the composition of our interest-bearing liabilities.
The primary source of funding for increases in assets during the December 31,
2008 quarter was deposits, and the issuance of preferred stock of $12,643,000.
Deposits were up due to increases in time deposits and money market accounts,
offset by seasonal decreases in non-interest bearing transaction accounts.
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. During the December 31, 2008
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 December 31, 2008 quarter was primarily in
construction loans, residential first mortgage and home






13






equity
loans and lines, and commercial business loans, offset by a decrease in
automobile 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 December 31, 2008,
our assets totaled $507.9 million, including net loans receivable of $468.8
million, compared to total assets of $491.2 million, including net loans
receivable of $437.2 million, at March 31, 2008.  Construction loans
totaled $63.2 million or 13.0%, commercial real estate were $151.5 million or
31.2%, residential first mortgage loans were $140.6 million or 28.9%, commercial
business loans were $45.7 or 9.4%, and home equity loans and lines were $41.0
million or 8.4% of our total loan portfolio at December 31, 2008 compared to
construction loans of $53.9 million or 11.9%, commercial real estate of $150.1
or 33.1%, residential first mortgage loans of $122.6 or 27.1%, commercial
business $41.6 million or 9.2%, and home equity loans and lines of $32.8 million
or 7.2% at March 31, 2008.




At
December 31, 2008, non-performing assets totaled approximately $4.9 million or
0.96% of assets compared to $1.6 million or .33% of assets at March 31, 2008.
Our allowance for loan losses to non-performing assets was 75.2% and to total
loans was .78% at December 31, 2008 compared to 198.6% and .73%, respectively at
March 31, 2008.  The increase consisted of $2.4 million of nonaccrual
loans, primarily various consumer loans which included home equity loans and
$900,000 of real estate owned and repossessed assets. Due primarily to the
slowing economy we expect an increase in non-performing assets in the
future.




During
our fiscal year 2008, we evaluated the benefits of the increased yields on our
credit card portfolio with the higher risk and operating costs related to
maintaining and servicing an unsecured credit card portfolio. We believed that
offering a credit card product was important to our existing customer base and
for obtaining new customers. As a result of this evaluation, we entered into an
agent-bank relationship with an unaffiliated non-bank pursuant to which our
customers can obtain credit cards with the Community Bank brand and for which we
earn commissions for new accounts and a percentage of interchange fees, but for
which we incur no liability or credit risk. At the same time, we sold our
existing credit card portfolio to that unaffiliated organization. During the
December 31, 2007 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 not experienced stable
to moderate declines in real estate values in our market areas. The Company has
experienced moderate increases in both delinquencies and charge-offs for the
2009 fiscal year. Delinquencies have increased from .86% at March 31, 2008 to
2.68% at December 31, 2008. General downward economic trends, reduced
availability of commercial credit and increasing unemployment have negatively
impacted the credit performance of commercial and 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 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.  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.






14







The
recently enacted Emergency Economic Stabilization Act of 2008 (“EESA”)
authorizes 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 TARP also will
include direct purchases or guarantees of troubled asset of financial
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.





EESA also
increased FDIC deposit insurance on most accounts from $100,000 to
$250,000.  This increase is in place until the end of 2009 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.AtDecember 31, 2008, we
had $1.9 million in such accounts in excess of $250,000.





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




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






15






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





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




Large
groups of smaller balance homogeneous loans are collectively evaluated for
impairment.  Accordingly, the 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 $16.7 million to $507.9 million at December 31,
2008 from $491.2 million at March 31, 2008 due to increases in loans receivable
of $31.9 million, deferred tax asset of $3.7 million and cash of $1.3 million,
offset by decreases in cash consisting of interest bearing deposits at other
financial institutions of $11.2 million and securities available for sale of
$9.4 million. The increase in loans was funded with an the issuance of $12.6
million of preferred stock, increases in deposits of $6.7 million, increases in
FHLB Advances and borrowings of $2.0 million and decreases in interest bearing
deposits of $11.2 million at December 31, 2008 from March 31, 2008. FHLB
Advances increased by $3.0 million and other borrowings decreased by $1.0
million.  Stockholders’ equity increased $8.3 million to $47.0 million
at December 31, 2008, from $38.7 million at March 31, 2008, due to the preferred
stock issuance of $12.6 million offset by the loss for the nine months ended
December 31, 2008of $5.3 million and cash dividend payments.





At
December 31, 2008, non-performing assets totaled approximately $4.9 million or
0.96% of assets compared to $1.6 million or .33% of assets at March 31,
2008.Non-performing assets at
December 31, 2008 were comprised of repossessed assets of $1.5 million and non
accrual loans of $3.4 million. Included in the total non-performing assets at
December 31, 2008 was one relationship of approximately $2.0 million which
includes $1.3 million of residential lots. At December 31, 2008, our allowance
for loan losses to non-performing assets was75.2%and to total loans was
..78% compared to 198.6% and .73%, respectively at March 31, 2008. At December
31, 2008 the percentage of delinquent loans to total loans was 2.68% compared to
..86% at March 31, 2008. 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.





As of
December 31, 2008, there were also $11.3million 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
residential real estate loans. No individual loan in this category has a balance
that exceeds $2.0 million.






16







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) our need for funds, (ii) expected deposit flows, (iii) the
yields available on short-term liquid assets, (iv) the liquidity of our loan
portfolio and (v) the objectives of our asset/liability management program.
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 December 31, 2008, the
Bank’s liquidity ratio (liquid assets as a percentage of net withdrawable
savings and current borrowings) was 3.3%.




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 December
31, 2008, the total amount of borrowing available under the FHLB line of credit
was approximately $129,000,000. At December 31, 2008, principal obligations to
the FHLB consisted of $79,000,000 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 line of credit with a bank in the amount of $5,000,000 at December
31, 2008 of which $1,000,000 had been drawn on the line.




At
December 31, 2008 we had commitments to purchase or originate $10.8 million of
loans. Certificates of deposit scheduled to mature in one year or less at
December 31, 2008, totaled $230.2 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 December 31, 2008, we had brokered or internet time deposits of $16.3
million.





The
Bank’s regulatory capital changed from “adequately capitalized” at September 30,
2008 to “well capitalized” at December 31, 2008 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 callable after three years at
100% of the issue price, subject to the approval of the Company’s federal
regulator.








RESULTS
OF OPERATIONS





Three Months Ended December
31, 2008 and 2007.





General.  Net
income for the three months ended December 31, 2008 increased $3,315,000 or
358.9% to $4,239,000 from $924,000 for the three months ended December 31, 2007.
Net interest income increased $386,000, the provision for loan losses increased
$791,000, non-interest income decreased $502,000 and non-interest expense
increased $418,000 during the three months ended December 31, 2008 compared to
the same period in 2008. Return on equity for the three months ended December
31, 2008 was 49.9% compared to 9.33% for the three month period ended December
31, 2007. Return on assets was3.39% for quarter ended December 31, 2008 compared to 0.76% for the same
period in the previous fiscal year.





Interest Income. Total
interest income decreased by $1,034,000 to $7.1 million for the three months
ended December 31, 2008, from $8.1 million for the three months ended December
31, 2007, due to lower yields partially offset by higher average loan
balances.  Investment securities income decreased by $203,000 due to
lower average balances as a result of calls and maturities on securities. Other
interest income decreased by $270,000 due to elimination of dividends on Freddie
Mac common and preferred stock and a lower yield on FHLB stock.  The
decrease in yields was due to lower market interest rates generally. The average
yield earned on interest-earning assets was 5.92% for the three months ended
December 31, 2008 compared to 6.92% for the three months ended December 31,
2007.






17






Interest
Expense.  Total interest expense decreased by $1,420,000 to
$3.0 million for the quarter ended December 31, 2008, from $4.4 million for the
quarter ended December 31, 2007. Interest on deposits decreased by $642,000 to
$2.6 million for the quarter ended December 31, 2008 from $3.2 million for the
quarter ended December 31, 2007 due to a decrease in the average rate paid
partially offset by higher average deposit balances. Interest expense on
borrowed money decreased by $778,000 to $430,000 for the quarter ended December
31, 2008 compared to $1.2 million for the quarter ended December 31, 2007. A
decrease in the average rate paid on borrowings from 4.88% to 1.65% offset by an
increase in the average balance of borrowings from $98.3 million for the
December 31, 2007 quarter to $103.9 million for the December 31, 2008 quarter
accounted for the decrease. The average rate paid on interest-bearing
liabilities was 2.52% during the three months ended December 31, 2008 compared
to 3.98% for the three months ended December 31, 2007.





Provision for Loan
Losses.  The provision for loan losses increased $791,000 to
$894,000 for the three months ended December 31, 2008, from $103,000 for the
three months ended December 31, 2007. The amount of the provision for loan
losses for the quarter ended December 31, 2008 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 December 31, 2008, 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 decreased by $502,000 to $415,000
for the three months ended December 31, 2008, from $917,000 for the three months
ended December 31, 2007 due primarily to an Other Than Temporary Impairment
adjustment on our Freddie Mac and Fannie Mae Available For Sale securities of
$482,000 and a reduction in insufficient funds 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 this relationship will continue to be a source of fee and
service charge income for the Bank.





Noninterest
Expense.  Noninterest expense increased by $418,000 to $3.5
million for the three months ended December 31, 2008 compared to the same period
last year. The increase in noninterest expense resulted primarily from
compensation related expenses due generally to merit increases, additional loan
and retail personnel, professional services and federal deposit insurance
premiums.





Federal
deposit insurance premiums during the three months ended December 31, 2008
totaled $58,000, compared $10,000 for the same period in 2007.  These
premiums are expected to increase in 2009 due to recent strains on the Federal
Deposit Insurance Corporation deposit insurance fund due to the cost of large
bank failures and increase in the number of troubled banks.  The
current rates for Federal Deposit Insurance Corporation assessments have ranged
from 5 to 43 basis points, depending on the health of the insured
institution.  The Federal Deposit Insurance Corporation has proposed
increasing the current deposit insurance assessment rates uniformly for all
institutions by 7 basis points (to a range from 12 to 50 basis points) for the
first quarter of 2009.  The proposed rule would also alter the way the
FDIC calculates federal deposit insurance assessment rates beginning in the
second quarter of 2009 and thereafter.  The FDIC also proposed that it
could increase assessment rates in the future without formal
rulemaking.





Taxes.  Taxes
decreased by $4,640,000 to a $(4,203,000) benefit for the three months ended
December 31, 2008, from a $437,000 tax provision for the three months ended
December 31, 2007. The effective tax rate increased from 32.1% for the December
31, 2007 quarter to 34.9% for the December 31, 2008 quarter.





Nine Months Ended December
31, 2008 and 2007.





General.  Net
income (loss) for the nine months ended December 31, 2008 was ($5.3) million, a
decrease of $8.1 million compared to $2.8 million for the nine months ended
December 31, 2007. The decrease was due primarily to an Other Than Temporary
Impairment adjustment on our Freddie Mac and Fannie Mae  Available for
Sale securities






18






of
$11,536,000 (net of a tax benefit of $4,384,000), an increase in the provision
for loan loss and an increase in noninterest expense resulting from higher
expenses associated with compensation, professional services and federal
insurance premium. Return/(Loss) on equity for the nine months ended December
31, 2008 was (18.81)% compared to 9.57% for the nine month period ended December
31, 2007 Return/(Loss) on assets was (1.43)% for nine months ended
December 31, 2008 compared to .79% for the same period in the previous fiscal
year.





Interest
Income.  Total interest income decreased by $2.5
million  or 10.1% to $21.9 million for the nine months ended December
31, 2008, from $24.3 million for the nine months ended December 31, 2007 due to
a decrease in loan yields, a decrease in average investment security balances
and the elimination of Freddie Mac 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 7.06% to 6.18% for
the same periods.





Interest
Expense.  Total interest expense decreased by $3.2 million or
24.8% to $9.8 million for the nine months ended December 31, 2008, from $13.0
million for the nine months ended December 31, 2007  Interest on
deposits decreased $1.2 million to $8.1 million for the nine months ended
December 31, 2008, from $9.3 million for the same period last year due to a
decrease in the average rate paid on deposit balances offset by an increase in
the average deposit balances. The rate paid on deposits decreased from 3.68% for
the nine months ended December 31, 2007 to 3.05% for the same period in the
current fiscal year. Interest expense on borrowed money decreased $2.0 million
to $1.7 million for the nine months ended December 31, 2008 from $3.8 million
for the nine months ended December 31, 2007 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 $98.3
million for the nine months ended December 31, 2007 from 103.9 million for the
nine months ended December 31, 2008. The average rate paid on borrowings
decreased from 5.10% for the nine months ended December 31, 2007 to 2.31% for
the nine month period ended December 31, 2008.





Provision for Loan
Losses.  The provision for loan losses increased $1.2 million
to $1.6 million for the nine months ended December 31, 2008 from $455,000 for
the nine months ended December 31, 2007 based on management’s  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) decreased by $11.6 million
to ($9.0) million for the nine months ended December 31, 2008, from $2.6 million
for the nine months ended December 31, 2007 due primarily to an Other Than
Temporary Impairment adjustment on our Freddie Mac and Fannie Mae Available for
Sale securities of $11.5 million.





Noninterest
Expenses.  Noninterest expenses increased $938,000 for the nine
months ended December 31, 2008, compared to the same period last
year.  The increase in noninterest expense resulted primarily from
compensation related expenses due generally to merit increases, additional loan
and retail personnel, professional services and federal deposit insurance
premiums.





Taxes.  We recorded
a $3.4 million tax benefit for the nine months ended December 31, 2008 compared
to a $1.4 million tax provision for the nine months ended December 31, 2007. The
effective tax rate decreased to 33.7% for the December 31, 2008 period from
32.4% for the same period ended December 31, 2007.




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,
2008.




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,
2008.






19






RECENT
ACCOUNTING PRONOUNCEMENTS





In
September 2006, the Financial Accounting Standards Board (FASB) reached a
consensus on Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for
Deferred Compensation and Postretirement Benefit Aspects of Endorsement
Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-4”). In March 2007,
the FASB reached a consensus on EITF Issue 06-10, “Accounting for Collateral
Assignment Split-Dollar Life Insurance Arrangements,” (“EITF Issue 06-10”). Both
of these standards require a company to recognize an obligation over an
employee’s service period based upon the substantive agreement with the employee
such as the promise to maintain a life insurance policy or provide a death
benefit postretirement. The Company adopted the provisions of these standards
effective April 1, 2008. The adoption of these standards was not material to the
consolidated financial statements.





In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurements” (SFAS 157).  SFAS 157 defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 does not require any new fair value
measurements, but rather, provides enhanced guidance to other pronouncements
that require or permit assets or liabilities to be measured at fair
value.  This Statement is effective for financial statements issued
for fiscal years beginning after November 15, 2007 and interim periods within
those years.  The FASB has approved a one-year deferral for the
implementation of the Statement for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis.The Company adopted SFAS
157 effective April 1, 2008. The adoption of SFAS 157 was not material to the
consolidated financial statements.





In
February 2007, the FASB issued Statement of Financial Accounting Standards No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities”
(SFAS 159).  This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. The objective of
this Statement is to improve financial reporting by providing entities with the
opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge
accounting provisions. The fair value option established by this Statement
permits all entities to choose to measure eligible items at fair value at
specified election dates. A business entity shall report unrealized gains and
losses on items for which the fair value option has been elected in earnings at
each subsequent reporting date. The fair value option may be applied instrument
by instrument and is irrevocable. SFAS 159 is effective as of the beginning of
an entity’s first fiscal year that begins after November 15, 2007, with early
adoption available in certain circumstances. The Company adopted SFAS 159
effective April 1, 2008. The Company decided not to report any existing
financial assets or liabilities at fair value that are not already reported,
thus the adoption of this statement did not have a material impact on the
consolidated financial statements.





In
December 2007, the FASB issued Statement of Financial Accounting Standards No.
141(R), “Business Combinations” (SFAS 141(R)). The Standard will significantly
change the financial accounting and reporting of business combination
transactions.  SFAS 141(R) establishes principles for how an acquirer
recognizes and measures the identifiable assets acquired, liabilities assumed,
and any noncontrolling interest in the acquiree; recognizes and measures the
goodwill acquired in the business combination or a gain from a bargain purchase;
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
December 2007, the FASB issued Statement of Financial Accounting Standards No.
160, “Noncontrolling Interests in Consolidated Financial Statements an Amendment
of ARB No. 51” (SFAS 160).  The Standard will significantly change the
financial accounting and reporting of noncontrolling (or minority) interests in
consolidated financial statements.  SFAS 160 is effective as of the
beginning of an entity’s first fiscal year that begins after December 15, 2008,
with early adoption prohibited.  The Company does not expect the
implementation of SFAS 160 to have a material impact on its consolidated
financial statements, at this time.





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






20





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





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities – an amendment of SFAS No. 133,” (“SFAS No. 161”). SFAS
No. 161 requires that an entity provide enhanced disclosures related to
derivative and hedging activities. SFAS No. 161 is effective for the Company on
April 1, 2009.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (“SFAS No. 162”). SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles. SFAS No.
162 is effective 60 days following the SEC’s approval of the Public Company
Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present
Fairly in Conformity With Generally Accepted Accounting Principles.” Management
does not expect the adoption of the provision of SFAS No. 162 to have any impact
on the consolidated financial statements.





In
September 2008, the FASB issued FSP FAS 133-1 and FIN 45-4, “Disclosures about
Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No.
133 and FASB Interpretation No. 45; and Clarification of the Effective Date of
FASB Statement No. 161,” (“FSP 133-1 and FIN 45-4”). FSP 133-1 and FIN 45-4
require a seller of credit derivatives to disclose information about its credit
derivatives and hybrid instruments that have embedded credit derivatives to
enable users of financial statements to assess their potential effect on its
financial position, financial performance and cash flows. The disclosures
required by FSP 133-1 and FIN 45-4 will be effective for the Company on December
31, 2008 and is not expected to have a material impact on the consolidated
financial statements.





In
October 2008, the FASB issued FSP FAS 157-3, “Determining the Fair Value of a
Financial Asset When the Market for That Asset Is Not Active,” (“FSP 157-3”).
FSP 157-3 clarifies the application of SFAS No. 157 in determining the fair
value of a financial asset during periods of inactive markets. FSP 157-3 was
effective as of September 30, 2008 and did not have material impact on the
Company’s consolidated financial statements.





In
December 2008, the FASB issued FSP No. FAS 140-4 and FIN 46(R)-8, “Disclosures
by Public Entities (Enterprises) about Transfers of Financial Assets and
Interests in Variable Interest Entities.” FSP No. FAS 140-4 and FIN 46(R)-8
requires enhanced disclosures about transfers of financial assets and interests
in variable interest entities. The FSP is effective for interim and annual
periods ending after December 15, 2008. Since the FSP requires only additional
disclosures concerning transfers of financial assets and interest in variable
interest entities, adoption of the FSP will not affect the Company’s financial
condition, results of operations or cash flows.





In
January 2009, the FASB reached a consensus on EITF Issue 99-20-1. This FSP
amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest
Income and Impairment on Purchased Beneficial Interests and Beneficial Interests
That Continue to Be Held by a Transferor in Securitized Financial Assets,” to
achieve more consistent determination of whether an other-than-temporary
impairment has occurred. The FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure
requirements in FASB Statement No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” and other related guidance. The FSP is effective
for interim and annual reporting periods ending after December 15, 2008 and
shall be applied prospectively. The FSP was effective as of December 31, 2008
and did not have a material impact on the consolidated financial
statements.





21




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 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;




·
            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 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.







ITEM
3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





There
have been no material changes in market risk since March 31, 2008 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,
2008.





22


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 ofDecember 31, 2008, was carried out under the supervision
and with the participation of the Company's Chief Executive Officer, Chief
Financial Officer and several other members of the Company's senior management.
The Company's Chief Executive Officer and Chief Financial Officer concluded that
the Company's disclosure controls and procedures in effectas of December 31, 2008,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 endedDecember 31, 2008, that have materially affected, or
arereasonably 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.





23


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





Not Applicable.





Item
5.  Other Information


Not Applicable.


Item
6.  Exhibits





See Exhibit Index


24





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:
      February 12, 2009
            By:
            /s/
      R. Jerry GilesR.
      Jerry Giles
              Chief
      Financial Officer
              (Duly
      Authorized Officer)



























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 each of P. Douglas Richard and Chris P. Kyriakides, filed
      on May 5, 2006 as Exhibit 99.4 to the Registrant’s Current Report on Form
      8-K (SEC File No. 000-18265), is incorporated herein by
      reference.10.3
            
            Registrant’s
      1996 Incentive Plan, filed on July 5, 1996 as an exhibit to the
      Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No.
      000-18265), is incorporated herein by reference.10.4
            
            Amended
      and Restated Employment Agreement by and between Community Bank and Chris
      P. Kyriakides, filed on May 5, 2006 as Exhibit 99.3 to the Registrant’s
      Current Report on Form 8-K (SEC File No. 000-18265), is incorporated
      herein by reference.10.5
            
            Form
      of Change in Control Agreement by and between Community Financial
      Corporation and each of R. Jerry Giles and Benny N. Werner, filed on May
      5, 2006 as Exhibit 99.5 to the Registrant’s Current Report on Form 8-K
      (SEC File No. 000-18265), is incorporated herein by
reference.10.6
            
            Retirement
      Agreements by and between Community Bank and Non-Employee Directors filed
      on June 29, 2004 as an exhibit to the Registrant’s Annual Report on Form
      10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 2004,
      and incorporated here by reference.10.7
            
            Form
      of First Amendment to the Retirement Agreements by and between Community
      Bank and Non-Employee Directors, filed on June 29, 2005 as an exhibit to
      the Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for
      the fiscal year ended March 31, 2005, is incorporated here by
      reference.10.8
            
            Salary
      Continuance Agreements by and between Community Bank and Officers Richard,
      Kyriakides, Giles, Smiley and Werner filed on June 29, 2004 as an exhibit
      to the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-18265)
      for the fiscal year ended March 31, 2004, and incorporated here by
      reference.   
    10.9
            
            Form
      of Director Deferred Fee Agreement, as amended, filed on June 29, 2005 as
      an exhibit to the Registrant’s Annual Report on Form 10-K (SEC File No.
      000-18265) for the fiscal year ended March 31, 2005, is incorporated here
      by reference.10.10
            
            Registrant’s
      2003 Stock Option and Incentive Plan, filed on 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.10.11
            
            Form
      of Incentive Stock Option Agreement and Non-Qualified Stock Option
      Agreement for Registrant’s 2003 Stock Option and Incentive Plan, filed on
      August 12, 2005 as an exhibit to the Registrant’s Quarterly Report on Form
      10-Q (SEC File No. 000-18265) for the quarter ended June 30, 2005, are
      incorporated herein by reference.10.12
            
            Employment
      Agreement by and between Community Bank and Norman C. Smiley, III, filed
      on June 16, 2008 as Exhibit 10.1 to the Registrant’s Current Report on
      Form 8-K (SEC File No. 000-18265), is incorporated herein by
      reference.10.13
            
            Change
      in Control Agreement by and between Community Financial Corporation and
      Norman C. Smiley, III, filed on June 16, 2008 as an exhibit to the
      Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is
      incorporated herein by reference.10.14
            
            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.10.15
            
            Form
      of Change in Control Agreement by and between Community Financial
      Corporation and John Howeton is filed with this Form 10-Q.10.16
            
            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.10.17
            
            Form
      of Compensation Modification Agreement and Waiver, executed by each of P.
      Douglas Richard, Norman C. Smiley, III and Chris P. Kyriakides, 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.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