Community Financial (CFFC) 10-Q 2007 Q1 Quarterly report

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

FORM 10-Q

(Mark one)

	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
OR
	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________

Commission file number      0-18261     

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

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

38 North Central Ave., Staunton, Va. 24401(Address of principal executive offices zip code)

(540) 886-0796(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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     No   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated or a non-accelerated filer. See definition of "accelerated filer" and "large accelerated filer" (as defined in Rule 12b-2 of the Exchange Act). (Check one)
Large accelerated filer             Accelerated filer             Non-accelerated filer

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

Number of shares of Common Stock, par value $.01 per share, outstanding at the close of business on August 8, 2006:   4,247,732.

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COMMUNITY FINANCIAL CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Statements of Financial Condition at June 30, 2006 (unaudited) and March 31, 2006	3
	Consolidated Statements of Income for the Three Months Ended June 30, 2006 and 2005 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Ended June 30, 2006 and 2005(Unaudited)	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II.	OTHER INFORMATION	17
Signature Page		18
Exhibit Index		20

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Part I. Financial Information

Item 1. Financial Statements

COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	June 30 2006	March 31 2006
	(Unaudited)
ASSETS
Cash (including interest-bearing   deposits of approximately   $1,437,000 and $1,742,000)	$ 6,638,540	$ 3,507,261
Securities
Held to maturity	25,118,188	25,470,650
Available for sale, at fair value	12,726,171	13,539,075
Restricted investment in Federal   Home Loan Bank stock, at cost	4,935,300	4,350,300
Loans receivable, net of allowance   for loan losses of $2,991,934 and   $2,966,077	368,561,279	358,713,961
Real estate owned	197,464	119,869
Property and equipment, net	8,173,352	8,215,050
Accrued interest receivable
Loans	1,525,643	1,476,353
Investments	837,393	824,998
Prepaid expenses and other assets	6,600,119	6,388,960
Total Assets	$435,313,449	$422,606,477
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits	$305,333,090	$306,848,545
Advances from Federal Home Loan     Bank	91,000,000	78,000,000
Securities sold under agreement to     repurchase	1,500,040	976,427
Advance payments by borrowers for     taxes and insurance	58,232	128,612
Other liabilities	1,955,623	1,486,144
Total Liabilities	399,846,985	387,439,728
Stockholders' Equity
Preferred stock $.01 par value,     authorized 3,000,000 shares,     none outstanding	---	---
Common stock, $.01 par value,     authorized 10,000,000 shares,     4,247,432 and 2,121,056 shares     outstanding	42,474	21,211
Additional paid in capital	4,795,602	4,782,126
Retained earnings	30,040,278	29,271,941
Accumulated other comprehensive     income	588,110	1,091,471
Total Stockholders' Equity	35,466,464	35,166,749
Total Liabilities and             Stockholders' Equity	$435,313,449	$422,606,477

See accompanying notes to unaudited interim consolidated financial statements.

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COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30,
	2006	2005
	(Unaudited)
INTEREST AND DIVIDEND INCOME
Loans	$6,363,251	$5,292,302
Investment securities	259,786	269,449
Other	286,466	248,849
Total interest income	6,909,503	5,810,600
INTEREST EXPENSE
Deposits	2,156,930	1,473,964
Borrowed money	1,115,924	733,043
Total interest expense	3,272,854	2,207,007
NET INTEREST INCOME	3,636,649	3,603,593
PROVISION FOR LOAN LOSSES	41,174	125,155
NET INTEREST INCOME AFTER   PROVISION FOR LOAN LOSSES	3,595,475	3,478,438
NONINTEREST INCOME
Service charges, fees     and commissions	649,091	648,995
Miscellaneous	82,877	145,137
Total noninterest income	731,968	794,132
NONINTEREST EXPENSE
Compensation & benefits	1,700,489	1,562,319
Occupancy	349,927	325,801
Data processing	311,919	280,086
Federal insurance premium	9,071	9,455
Miscellaneous	435,065	417,652
Total noninterest expense	2,806,471	2,595,313
INCOME BEFORE TAXES	1,520,972	1,677,257
INCOME TAXES	497,790	558,012
NET INCOME	$1,023,182	$1,119,245
BASIC EARNINGS PER SHARE	$ 0.24	$ 0.27
DILUTED EARNINGS PER SHARE	$ 0.23	$ 0.26
DIVIDENDS PER SHARE	$ 0.06	$ 0.06

See accompanying notes to unaudited interim consolidated financial statements.

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COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

	Three Months Ended June 30
	2006	2005
	(Unaudited)
OPERATING ACTIVITIES
Net income	$ 1,023,182	$ 1,119,245
Adjustments to reconcile net income to     net cash provided by operating     activities
Provision for loan losses	41,174	125,156
Depreciation	148,711	131,351
Amortization of premium and accretion         of discount on securities, net	2,462	2,829
Increase in net deferred loan fees	8,161	5,394
Decrease in deferred income taxes	(38,690)	(23,275)
(Increase) decrease in other assets	(272,844)	347,507
Increase in other liabilities	669,909	108,770
Net cash provided by operating           activities	1,582,065	1,816,977
INVESTING ACTIVITIES
Proceeds from maturities of held to     maturity securities	350,000	1,090,000
Net increase in loans	(9,819,230)	(4,867,344)
Purchases of property and equipment	(107,013)	(144,221)
(Purchase) redemption of FHLB stock	(585,000)	180,000
(Increase) decrease in repossessed assets	(77,595)	7,791
Net cash absorbed by investing       activities	(10,238,838)	(3,733,774)
FINANCING ACTIVITIES
Dividends paid	(254,845)	(229,692)
Net (decrease) increase in deposits	(1,515,455)	8,014,922
Proceeds from advances and other     borrowed money	575,225,339	91,660,836
Repayments of advances and other     borrowed money	(561,701,726)	(95,882,422)
Proceeds from issuance of common stock	34,739	86,717
Net cash provided by     financing activities	11,788,052	3,650,361
INCREASE IN CASH AND CASH EQUIVALENTS	3,131,279	1,733,564
CASH AND CASH EQUIVALENTS-beginning of period	3,507,261	2,345,769
CASH AND CASH EQUIVALENTS-end of period	$ 6,638,540	$ 4,079,333

See accompanying notes to unaudited interim consolidated financial statements

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COMMUNITY FINANCIAL CORPORATION
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2005

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 three months ended June 30, 2006, are not necessarily indicative of the results that may be expected for the year ending March 31, 2007.

Note 2. - Stock Split

On July 26, 2006, the Company declared a 2 for 1 stock split in the form of a 100% stock dividend payable on August 23, 2006. Basic and diluted earnings per share have been retroactively adjusted for this split for all periods presented.

NOTE 3. - 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. Prior to April 1, 2006 no compensation expense was recognized for stock option grants as all such grants had an exercise price not less than fair market value on the date of grant.

There were no stock options granted during the June 30, 2006 quarter and no stock-based compensation recognized. No proforma compensation expense is disclosed for the quarter ended June 30, 2006 as no options were granted or vested.

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The following summarizes the stock option activity for the three months ended June 30, 2006:

	Shares	Weighted Average Exercise Price	Weighted Average Remaining Contractual Term	Intrinsic Value of Unexercised In-the-Money Options
Options outstanding, March 31, 2006	545,400	$ 7.97
Granted	---	---
Exercised	(10,000)	$ 5.25
Forfeited	(200)	$ 6.00
Options outstanding, June 30, 2006	535,200	$ 8.02	5.5
Options exercisable, June 30, 2006	535,200	$ 8.02	5.5	$1,969,100

Information in the above table has been restated to reflect the 2 for 1 split in the form of a 100% stock dividend described in Note 2.

The total intrinsic value of in the money options exercised during the three month ended June 30, 2006 was $59,650.

NOTE 4. - 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. 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 Ended
	June 30, 2006			June 30, 2005
	Income	Weighted Average Shares	Per-Share Amount	Income	Weighted Average Shares	Per Share Amount
Basic EPS
Income available to   common stockholders	$1,023,182	4,246,262	$0.24	$1,119,245	4,176,608	$0.27
Effect of Dilutive   Securities
Options	---	154,816		---	172,514
Diluted EPS
Income available to   common stockholders	$1,023,182	4,401,078	$0.23	$1,119,245	4,349,122	$0.26

During the quarter ended June 30, 2006, no stock options were excluded from the calculation of earnings per share because they would have been anti-dilutive. During the quarter ended June 30, 2005, stock options representing 98,000 shares were not included in the calculation of earnings per share because they would have been anti-dilutive.

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Information in the above table has been restated to reflect the 2 for 1 stock split in the form of a 100% stock dividend described in Note 2.

NOTE 5. - STOCKHOLDERS' EQUITY

The following table presents the Bank's regulatory capital levels at June 30, 2006:

	Amount Required	Percent Required	Actual Amount	Actual Percent	Excess Amount
Tangible Capital	$ 6,540,000	1.50%	$33,850,000	7.76%	$27,310,000
Core Capital	17,441,000	4.00	33,850,000	7.76	16,409,000
Risk-based Capital	27,562,000	8.00	37,207,000	10.80	9,645,000

The primary source of funds for the payment of dividends to its stockholders are 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.

NOTE 6. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS

Total interest paid for the three months ended June 30, 2006 and 2005 was $2,998,542 and $2,214,541, respectively. Total income taxes paid for the three months ended June 30, 2006 and 2005 was $450,514 and $150,584.

NOTE 7. - 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 three-month periods ended June 30, 2006 and 2005:

	Three months Ended June 30
	2006	2005
(Amounts in thousands)
Net income	$1,023,182	$1,119,245
Other comprehensive income,   net of tax
Unrealized gains (losses)on securities:
Unrealized holding gains (losses)           arising during the period	(503,361)	258,734
Total comprehensive income	$519,821	$1,377,979

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Note 8. - 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 Ended June 30
	2006	2005
Service cost	$72,011	$71,932
Interest cost	36,048	33,009
Expected return on plan assets	(35,876)	(31,019)
Recognized net actuarial loss	6,849	8,597
	$79,032	$85,519

As disclosed in the Company's Form 10-K for the year ended March 31, 2006, a contribution of $373,000 to its pension plan is expected during the current fiscal year. As of June 30, 2006, no contributions have been made. The Company anticipates making all required contributions prior to March 31, 2007.

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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 and its subsidiary, Community 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 decreased $96,000, or 8.6%, to $1.0 million for the quarter ended June 30, 2006 compared to the June 30, 2005 quarter. The decrease was due primarily to an expected increase in noninterest expenses and a slower increase in net interest income offset by a decrease in the provision for loan losses. The increase in noninterest expense resulted primarily from higher compensation and benefits associated with additional loan personnel and the additional personnel needed to staff the branch we opened in April, 2006. The decrease in the loan loss provision is attributable primarily to excellent loan quality. Management is aware of the potential impact of rising interest rates on borrowers' ability to repay loans and will monitor the Bank's loan portfolio for future changes.

Net interest income for the quarter ended June 30, 2006 increased only slightly, $33,000, to $3.6 million compared to the comparable quarter in 2005. Net interest income, which is 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 June 30, 2006 was the growth in interest-earning assets, primarily loans, which was offset by a compressing interest rate spread. The decrease in the interest rate spread is due primarily to the current market relationship between short-term and long-term interest rates. We also did not purchase any investment securities during the quarter ended June 30, 2006 and anticipate limited security 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 rising interest rates may have on both the growth in interest-earning assets and our interest rate spread. The Bank has approximately $170 million in adjustable rate loans or 46% 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 rising interest rate environment has impacted the composition of our interest-bearing liabilities. The primary source of funding for increases in assets during the June 30, 2006 quarter was borrowings due both to the seasonal nature of checking account balances and more competitive deposit rates in our market areas. 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. As interest rates have increased, deposit balances in savings and money market accounts have decreased as customers have transferred funds to time deposits or equities markets. 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.

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On July 26, 2006, we declared a 2 for 1 stock split in the form of a 100% stock dividend payable on August 23, 2006. The Board of Directors and management anticipate the effects of the split will positively impact the liquidity of the Company's stock by increasing the number of shares outstanding and lowering the per share purchase price of our common stock.

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.

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

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

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

FINANCIAL CONDITION

The Company's total assets increased $12.7 million to $435.3 million at June 30, 2006 from $422.6 million at March 31, 2006 due to an increase in loans receivable of $9.8 million. These increases were funded with borrowings which increased $13.5 million at June 30, 2006, from March 31, 2006. Deposits decreased $1.5 million due primarily to seasonal trends for transaction accounts and customers preferences for high interest rate time deposits compared to savings and money market accounts. The decrease in deposits was due to a decrease in money market accounts of $1.1 million, savings accounts of $1.6 million and checking accounts of $1.7 million and partially offset by an increase in time deposits of $2.9 million. Stockholders' equity increased $300,000 to $35.5 million at June 30, 2006, from $35.2 million at March 31, 2006, due to earnings for the three month period ended June 30, 2006 offset by a payment of $0.06 per share in cash dividends and a decrease in the net unrealized gain on securities available for sale.

At June 30, 2006, non-performing assets totaled approximately $1,511,000 or .35 of assets compared to $589,000 or .14% of assets at March 31, 2006. Non-performing assets at June 30, 2006 were comprised primarily of loans 90 days or more delinquent which totaled $1.3 million. At June 30, 2006, our allowance for loan losses to non-performing loans was 168.3% and to total loans was .81%. 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 June 30, 2006, there were also $1.9 million in loans with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing loan categories. These loans are comprised primarily of residential real estate loans. No individual loan in this category has a balance that exceeds $202,000.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of funds are customer deposits, advances from the Federal Home Loan Bank of Atlanta, amortization and prepayment of loans 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

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projections are regularly reviewed and updated to assure that adequate liquidity is provided. As of June 30, 2006, the Bank's liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 7.5%.

At June 30, 2006, we had commitments to purchase or originate $10.7 million of loans. Certificates of deposit scheduled to mature in one year or less at June 30, 2006, totaled $75.6 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 June 30, 2006, we did not have brokered or internet time deposits.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2006 and 2005.

General. Net income for the three months ended June 30, 2006 was $1.0 million compared to $1.1 million for the three months ended June 30, 2005, a decrease of $96,000 or 8.6%. Net interest income increased $33,000, and non-interest income decreased $62,000 during the three months ended June 30, 2006 compared to the same period in 2005. Return on equity for the three months ended June 30, 2006 was 11.46% compared to 14.02% for the three month period ended June 30, 2005. Return on assets was 0.95% for quarter ended June 30, 2006 compared to 1.11% for the same period in the previous fiscal year.

Interest Income. Total interest income increased by $1.1 million to $6.9 million for the three months ended June 30, 2006, from $5.8 million for the three months ended June 30, 2005, due to both higher average loan balances, and higher yields for the three months ended June 30, 2006 as compared to the period ended June 30, 2005. The increase in yields was due to higher market interest rates generally. The average yield earned on interest-earning assets was 6.70% for the three months ended June 30, 2006 compared to 6.01% for the three months ended June 30, 2005.

Interest Expense. Total interest expense increased by $1.1 million to $3.3 million for the quarter ended June 30, 2006, from $2.2 million for the quarter ended June 30, 2005. Interest on deposits increased by $683,000 to $2.2 million for the quarter ended June 30, 2006 from $1.5 million for the quarter ended June 30, 2005 due to an increase in the average rate paid and higher average deposit balances. Interest expense on borrowed money increased by $383,000 to $1.1 million for the quarter ended June 30, 2006, from $733,000 for the quarter ended June 30, 2005, due to an increase in the rate paid on borrowings and offset by a decrease in average borrowings. The average balance for borrowings decreased from $91.1 million for the June 30, 2005 quarter to $89.8 million for the June 30, 2006 period while the rate paid on borrowings increased from 3.22% to 4.97% for the same periods. The average rate paid on interest-bearing liabilities was 3.34% during the three months ended June 30, 2006 compared to 2.39% for the three months ended June 30, 2005.

Provision for Loan Losses. The provision for loan losses decreased by $84,000 to $41,000 for the three months ended June 30, 2006, from $125,000 for the three months ended June 30, 2005. 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 June 30, 2006, management believes its allowance for loan losses is adequate to absorb any probable losses inherent in the Company's loan portfolio. Although management believes that it uses the

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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 $62,000 to $732,000 for the three months ended June 30, 2006, from $794,000 for the three months ended June 30, 2005 due to the gain on a real estate lot sale during the June 30, 2005 quarter. Service charges, fees and commissions on transaction accounts increased slightly for the quarter ended June 30, 2006 compared to the same quarter in the prior year. 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. Although we anticipate this relationship will continue to be a source of fee and service charge income for the Bank, fee income from this source has declined due to the increase in mortgage interest rates and the related decrease in mortgage loan activity.

Noninterest Expense. Noninterest expense increased by $211,000 to $2.8 million for the three months ended June 30, 2006 compared to the same period last year. The increase is attributable to compensation and benefits, which increased by $138,000 to $1.7 million compared to the same period last year. The increase in compensation and benefits resulted from the hiring of additional loan personnel and an additional branch location.

Taxes. Taxes decreased by $60,000 to $498,000 for the three months ended June 30, 2006, from $558,000 for the three months ended June 30, 2005. The effective tax rate decreased from 33.3% for the June 30, 2005 quarter to 32.7% for the June 30, 2006 quarter.

RECENT ACCOUNTING PRONOUNCEMENTS

In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing of Financial Assets an amendment of FASB Statement 140" (Statement 156).  Statement 156 amends Statement 140 with respect to separately recognized servicing assets and liabilities.  Statement 156 requires an entity to recognize a servicing asset or liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract and requires all servicing assets and liabilities to be initially measured at fair value, if practicable.  Statement 156 also permits entities to subsequently measure servicing assets and liabilities using an amortization method or fair value measurement method.  Under the amortization method, servicing assets and liabilities are amortized in proportion to and over the estimated period of servicing.  Under the fair value measurement method, servicing assets are measured at fair value at each reporting date and changes in fair value are reported in net income for the period the change occurs. Adoption of Statement 156 is required as of the beginning of fiscal years beginning subsequent to September 15, 2006.  Earlier adoption is permitted as of the beginning of an entity's fiscal year, provided the entity has not yet issued financial statements, including interim financial statements. The Corporation does not expect the adoption of Statement 156 at the beginning of 2007 to have a material impact.

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

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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, 2006 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, 2006.

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Item 4. Controls and Procedures

An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of June 30, 2006, 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 currently in effect are effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2006, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

The Company does not expect that its disclosure controls and procedures and internal control over financial reporting will prevent all 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.

Section 404 of the Sarbanes-Oxley Act of 2002 requires that companies evaluate and annually report on their systems of internal control over financial reporting. In addition, our independent accountants must report on management's evaluation. We are in the process of evaluating, documenting and testing our system of internal control over financial reporting to provide the basis for our report that will, for the first time, be a required part of our annual report on Form 10-K for the fiscal year ending March 31, 2008. Due to the ongoing evaluation and testing of our internal controls, there can be no assurance that if any control deficiencies are identified they will be remediated before the end of the 2008 fiscal year, or that there will not be significant deficiencies or material weaknesses that would be required to be reported.

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PART II. OTHER INFORMATION

Item 1.	Legal Proceedings
	Not Applicable.
Item 1A.	Risk Factors
	No material changes from risk factors as previously disclosed in Form 10-K.
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

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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 CORPORATION
Date: August 11, 2006	By:	/s/ R. Jerry GilesR. Jerry Giles Chief Financial Officer (Duly Authorized Officer)

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EXHIBIT INDEX
Exhibit Number	Document
3.1	Amended and Restated Articles of Incorporation, filed on July 5, 1996 as an exhibit to the Registrant's Definitive Proxy Statement on Schedule 14A (SEC File No. 000-18265), are incorporated herein by reference.
3.2	Bylaws, as amended and currently in effect, filed on SMay 5, 2006 as an Exhibit 99.1 to the Registrant's Current Report on Form 8-K (SEC File No. 000-18265) is incorporated herein by reference.
4	Registrant's Specimen Common Stock Certificate, filed on June 29, 1999, as Exhibit 4 to the Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 1999, is incorporated herein by reference.
10.1	Amended and Restated Employment Agreement by and between Community Bank and P. Douglas Richard, filed on May 5, 2006, as an 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 Bank and each of R. Jerry Giles, Norman C. Smiley, 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.

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10.8	Salary Continuance Agreements by and between Community Bank and Officers Richard, Kyriakides, Giles, Smiley and Werner filed on June 29, 2004 as an exhibit to the Registrant's Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 2004, and incorporated here by reference.
10.9	Form of Director Deferred Fee Agreement, as amended, filed on June 29, 2005 as an exhibit to the Registrant's Annual Report on Form 10-K (SEC File No. 000-18265) for the fiscal year ended March 31, 2005, is incorporated here by reference.
10.10	Registrant's 2003 Stock Option and Incentive Plan, filed on June 27, 2003 as an exhibit to the Registrant's Definitive Proxy Statement on Schedule 14A (SEC File No. 000-18265), is incorporated herein by reference.
10.11	Form of Incentive Stock Option Agreement and Non-Qualified Stock Option Agreement for Registrant's 2003 Stock Option and Incentive Plan, filed on August 12, 2005 as an exhibit to the Registrant's Quarterly Report on Form 10-Q (SEC File No. 000-18265) for the quarter ended June 30, 2005, are incorporated herein by reference.
11	Statement re computation of per share earnings (see Note 12 of the Notes to Consolidated Financial Statements included in Item 8 of this Annual Report on Form 10-K).
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