Community Financial (CFFC) 10-Q 2009 Q1 Quarterly report

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    June 30, 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      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  (Check one):

Large accelerated filer        Accelerated filer       Non-Accelerated filer          Small reporting company

       (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                  No    

Number of shares of Common Stock, par value $.01 per share, outstanding at the close of business on July 31, 2008:  4,349,958.

COMMUNITY FINANCIAL CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	Consolidated Balance Sheets at June 30, 2008 (unaudited) and March 31, 2008	3
	Consolidated Statements of Income for the Three Months Ended June 30, 2008 and 2007 (unaudited)	4
	Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2008 and 2007(Unaudited)	5
	Notes to Unaudited Interim Consolidated Financial Statements	6
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	17
Item 4T.	Controls and Procedures	17
PART II.	OTHER INFORMATION	19
Signature Page		20
Exhibit Index		21

Part I. Financial Information

Item 1. Financial Statements

COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
	June 30,			March 31,
	2008			2008
	(Unaudited)
ASSETS
Cash (including interest-bearing deposits of approximately $1,698,218 and $12,762,079)	$	7,777,323		$	15,998,041
Securities
Held to maturity		3,540,061			2,940,217
Available for sale, at fair value		8,669,772			9,562,410
Restricted investment in Federal    Home Loan Bank stock, at cost		5,075,800			5,210,800
Loans receivable, net of allowance for loan losses of $3,314,231 and $3,214,771		449,029,521			437,173,797
Real estate owned and repossessed assets		729,841			592,609
Property and equipment, net		8,019,287			7,923,481
Accrued interest receivable
Loans		1,973,381			1,953,550
Investments		97,824			125,523
Prepaid expenses and other assets		10,039,181			9,765,345
Total Assets	$	494,951,991		$	491,245,773
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	356,651,796		$	350,730,834
Borrowings		94,000,000			96,000,000
Securities sold under agreement to repurchase		2,609,071			2,834,412
Advance payments by borrowers for    taxes and insurance		78,512			150,545
Other liabilities		2,708,518			2,825,279
Total Liabilities		456,047,897			452,541,070
Stockholders’ Equity
Preferred stock $.01 par value,
authorized 3,000,000 shares,		---			---
none outstanding
Common stock, $0.01 par value,
authorized 10,000,000 shares,
4,346,358 and 4,335,958       shares outstanding		43,464			43,360
Additional paid in capital		5,460,306			5,391,704
Retained earnings		35,675,651			34,992,515
Accumulated other comprehensive        (loss)		(2,275,327	)		(1,722,876	)
Total Stockholders’ Equity		38,904,094			38,704,703
Total Liabilities and Stockholders’ Equity	$	494,951,991		$	491,245,773

See accompanying notes to unaudited interim consolidated financial statements.

COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF INCOME

	Three Months Ended June 30
	2008		2007
	(Unaudited)		(Unaudited)
INTEREST INCOME
Loans	$	7,153,169	$	7,522,956
Investment securities		34,833		240,178
Other		291,790		294,479
Total Interest Income		7,479,792		8,057,613
INTEREST EXPENSE
Deposits		2,876,332		2,946,439
Borrowed money		596,622		1,291,300
Total interest expense		3,472,954		4,237,739
NET INTEREST INCOME		4,006,838		3,819,874
PROVISION FOR LOAN LOSSES		151,998		135,476
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES		3,854,840		3,684,398
NONINTEREST INCOME
Service charges, fees and commissions		745,215		737,132
Other		94,778		91,905
Total noninterest income		839,993		829,037
NONINTEREST EXPENSE
Compensation & benefits		1,945,252		1,817,950
Occupancy		342,531		355,917
Data processing		310,639		334,192
Federal insurance premium		70,737		9,747
Advertising		94,323		60,025
Other		483,329		401,808
Total noninterest expense		3,246,811		2,979,639
INCOME BEFORE TAXES		1,448,022		1,533,796
INCOME TAXES		482,606		504,873
NET INCOME	$	965,416	$	1,028,923
BASIC EARNINGS PER SHARE	$	0.22	$	0.24
DILUTED EARNINGS PER SHARE	$	0.22	$	0.23
DIVIDENDS PER SHARE	$	0.065	$	0.065

See accompanying notes to unaudited interim consolidated financial statements.

COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Three Months Ended
	June 30
	2008			2007
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES
Net income	$	965,416		$	1,028,923
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses		151,998			135,476
Depreciation		139,322			150,611
Amortization of premium and accretion
of discount on securities, net		156			7,386
Increase (decrease) in net deferred loan fees		( 28,046	)		29,714
Increase (decrease) in deferred income taxes		50,085			(41,071	)
(Increase) in other assets		(273,836	)		(527,251	)
(Decrease) increase in other liabilities		(116,761	)		298,109
Net cash provided by operating
Activities		888,334			1,081,897
INVESTING ACTIVITIES
Proceeds from maturities of held to maturity securities		1,000,000			(1,600,000	)
Purchase of held to maturity securities		---			---
Net increase in loans		(11,751,955	)		(11,044,265	)
Purchases of property and equipment		(235,129	)		(42,705	)
Redemption (purchase) of FHLB stock		135,000			(675,000	)
Decrease (increase) in repossessed assets and real estate owned		(137,232	)		66,355
Net cash absorbed by investing activities		(12,589,316	)		(11,695,615	)
FINANCING ACTIVITIES
Dividends paid		(282,279	)		(279,223	)
Net increase in deposits		5,920,962			3,265,355
(Repayment) proceeds from advances and other borrowed
Money		(2,225,341	)		12,423,325
Proceeds from issuance of common stock		66,922			- - -
Net cash provided by financing activities		3,480,264			15,409,457
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(8,220,718	)		4,795,739
CASH AND CASH EQUIVALENTS – beginning of period		15,998,041			3,625,796
CASH AND CASH EQUIVALENTS – end of period	$	7,777,323		$	8,421,535
See accompanying notes to unaudited interim consolidated financial statements

COMMUNITY FINANCIAL CORPORATION

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 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 three months ended June 30, 2008 are not necessarily indicative of the results that may be expected for the year ending March 31, 2009.

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. 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 three month period ended June 30, 2008 and no stock-based compensation expense recognized as no options were granted or vested.

The following summarizes the stock option activity for the three months ended June 30, 2008:

						Weighted		Intrinsic
	Weighted					Average		Value of
	Average					Remaining		Unexercised
	Exercise					Contractual		In-the-Money
	Shares			Price		Term		Options
Options outstanding, March 31, 2008		429,000		$	8.28
Granted		---			---
Exercised		(10,400	)	$	6.43
Forfeited		(13,000	)	$	7.82
Options outstanding, June 30, 2008		405,600		$	8.35		4.6
Options exercisable, June 30, 2008		405,600		$	8.35		4.6	$352,810

The total intrinsic value of in-the-money options exercised during the three months ended June 30, 2008 was $21,052.

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. 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, 2008						June 30, 2007
			Weighted Average		Per Share				Weighted Average		Per Share
	Income		Shares		Amount		Income		Shares		Amount
Basic EPS
Income available to common stockholders	$	965,416		4,342,617	$	0.22	$	1,028,923		4,295,732	$	0.24
Effect of Dilutive Securities
Options		---		52,009				---		142,219
Diluted EPS
Income available to common stockholders	$	965,416		4,394,626	$	0.22	$	1,028,923		4,437,951	$	0.24

During the quarter ended June 30, 2008, stock options representing 243,000 shares were not included in the calculation of earnings per share because they would have been anti-dilutive. During the quarter ended June 30, 2007, no stock options were excluded in the calculation of earnings per share because they would have been anti-dilutive.

NOTE 4. - STOCKHOLDERS' EQUITY

The following table presents the Bank's regulatory capital levels at June 30, 2008:

	Amount Required	Percent Required	Actual Amount	Actual Percent	Excess Amount
Tangible Capital	$ 7,532,000	1.50%	$40,838,000	8.13%	$33,306,000
Core Capital	20,085,000	4.00	40,838,000	8.13	20,753,000
Risk-based Capital	34,056,000	8.00	44,121,000	10.36	10,065,000

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.

NOTE 5. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS

Total interest paid for the three months ended June 30, 2008 and 2007 was $ 3,952,581 and $4,482,058, respectively. Total income taxes paid for the three months ended June 30, 2008 and 2007 was $38,564 and $97,000.

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 three-month periods ended June 30, 2008 and 2007:

	Three months Ended June 30
Three months Ended June 30	2008	2007
Net Income	$965,416	$1,028,923
Other comprehensive (loss), net of tax:
Unrealized holding (losses) on available for sale securities     arising during the period	(552,451)	(432,707)
Total comprehensive income	$  412,965	$596,216

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 Ended
	June 30
	2008			2007
Service cost	$	87,669		$	77,336
Interest cost		53,010			44,055
Expected return on plan assets		(64,175	)		(43,935	)
Recognized net actuarial loss		4,888			6,608
	$	81,392		$	84,064

As disclosed in the Company’s Form 10-K for the year ended March 31, 2008, a contribution of $492,000 to its pension plan is expected during the current fiscal year. As of June 30, 2008, no contributions have been made. The Company anticipates making all required contributions prior to March 31, 2009.

NOTE 8. – SECURITIES

Information pertaining to securities with gross unrealized losses at June 30, 2008, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than Twelve Months				Over Twelve Months
	Gross		Estimated Market Value		Gross Unrealized Losses		Estimated Market Value
	Unrealized Losses
Held to Maturity
United States government and
agency obligations	$	9,425	$	2,090,575	$	-	$	-
State and municipal obligations		-		-		488		199,550
		9,425		2,090,575		488		199,550
Available for Sale
Equity securities		-		-		3,857,947		7,836,300
	$	9,425	$	2,090,575	$	3,858,435	$	8,035,850

At June 30, 2008, 6 debt securities had unrealized losses with aggregate depreciation of 0.43% from the Corporation’s amortized cost basis.  These unrealized losses related principally to government agencies.  In analyzing an issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies and whether

downgrades by bond debt rating agencies have occurred.  As management has the ability and intent to hold these debt securities until maturity or for a period of time sufficient to allow for any anticipated recovery in fair value, no declines are deemed to be other than temporary.

At June 30, 2008, four marketable equity securities had unrealized losses with aggregate depreciation of 32.99% from the Corporation’s cost basis.  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 anticipates that the fair value of this issue will approximate the security’s par value on the next dividend reset date. The securities have an investment grade rating of AA or better.  These unrealized losses relate primarily to government agencies.  The movement in the market value of the securities is closely related to changes in interest rates.  In analyzing the issuer’s financial condition, management considers whether the securities are issued by the federal government or its agencies and whether downgrades by bond debt rating agencies have occurred.  As management has the ability and intent to hold these equity securities for the foreseeable future, no declines are deemed to be other than temporary.

The recent declines in the value of the Freddie Mac and Fannie Mae equities is primarily related to reduced confidence by investors and consumers in the economy as foreclosures and delinquencies have increased in general. Exaggerated media coverage of these events has unnecessarily heightened concerns in regard to the financial stability of many financial institutions, including Freddie Mac and Fannie Mae. These are government sponsored organizations and both have asserted that they have adequate capital and liquidity. Regulators for these organizations and the Secretary of the Treasury have both publicly agreed with this contention and have expressed confidence in the viability of these entities. The U.S. Treasury has confirmed its support of Freddie Mac and Fannie Mae and recent legislation has been enacted to strengthen the regulatory process and provide additional sources of capital and liquidity to Freddie Mac and Fannie Mae. Both organizations are current on their obligations, including dividend payments. Considering the factors affecting the current valuation of these securities, management does not consider these securities to be other than temporarily impaired.

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 Corporation 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 asset or liability, either directly or indirectly, for substantially the full term of the financial instrument.
•	Level 3	inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Securities

Where quoted prices are available in an active market, securities are classified within level 1 of the valuation hierarchy. Level 1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then fair values are estimated by using pricing models, quoted prices of securities with similar characteristics, or discounted cash flow. Level 2 securities would include U.S.

agency securities, mortgage-backed agency securities, obligations of states and political subdivisions and certain corporate, asset backed and other securities. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within level 3 of the valuation hierarchy.  Currently, all of the Company’s securities are considered to be Level 2 securities.

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 at fair value less cost to sell. We believe that the fair value component in its valuation follows the provisions of SFAS No. 157.

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 for the three months ended June 30, 2008 decreased $64,000 or 6.2% to $965,000 compared to $1,029,000 for the three months ended June 30, 2007.  Net income for the quarter decreased due primarily to an increase in noninterest expense resulting from higher expenses associated with compensation.

Net interest income for the quarter ended June 30, 2008 increased $187,000, or 4.9%, to $4.0 million compared to the quarter ended June 30, 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 June 30, 2008 was the growth in interest-earning assets, primarily loans, and lower rates on interest-bearing liabilities. We purchased $1.6 million in investment securities during the three months ended June 30, 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 $309.9 million in adjustable rate loans or 69% 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 June 30, 2008 quarter was deposits and cash. Deposits were up due to the seasonal nature of 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 June 30, 2008 quarter, we experienced increased competition for time deposits primarily from financial institutions which reported reduced capital as the result of losses related to subprime lending. These institutions’ sources of funding have been reduced due to their reduced capital positions. 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 June 30, 2008 quarter was primarily in construction and commercial business loans. We anticipate that future loan growth will continue to be primarily in commercial real estate.  At June 30, 2008, our assets totaled $495.0 million, including net loans receivable of $449.0 million, compared to total assets of $491.2 million, including net loans receivable of $437.2 million, at March 31, 2008.  Commercial business loans totaled $48.1 million or 10.3% and construction loans totaled $58.8 million or 12.6% of our total loan portfolio at June 30, 2008 compared to commercial business loans of $41.6 million or 9.2% and construction loans of $53.9 million or 11.9% at March 31, 2008.

At June 30, 2008, non-performing assets totaled approximately $1.1 million or .23% 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 289.4% and to total loans was .73% at June 30, 2008.

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

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 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 $3.8 million to $495.0 million at June 30, 2008 from $491.2 million at March 31, 2008 due to an increase in loans receivable of $11.9 million. This increase was funded with an increase in deposits of $5.9 million and a decrease in cash of $8.2 million at June 30, 2008 from March 31, 2008. The increase in deposits was due to an increase in non-interest bearing accounts of $2.9 million, savings accounts of $1.2 million, money market accounts of $1.4 million, and time deposits of $642,000, partially offset by a decrease in transaction accounts of $302,000. Stockholders’ equity increased $200,000 to $38.9 million at June 30, 2008, from $38.7 million at March 31, 2008, due to earnings for the quarter, offset by unrealized losses on securities available for sale and a cash dividend payment.

At June 30, 2008, non-performing assets totaled approximately $1.1 million or .23% of assets compared to $1.6 million or .33% of assets at March 31, 2008.Non-performing assets at June 30, 2008 were comprised primarily of repossessed assets which totaled $700,000. At June 30, 2008, our allowance for loan losses to non-performing assets was 289.4% and to total loans was .73% compared to 313.3% and .73%, respectively at March 31, 2008. At June 30, 2008 delinquent loans to total loans was .92% 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 June 30, 2008, there were also $3.6 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 $207,000.

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 projections are regularly reviewed and updated to assure that adequate liquidity is provided. As of  June 30, 2008, the Bank’s liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 4.0%.

At June 30, 2008 we had commitments to purchase or originate $20.4million of loans. Certificates of deposit scheduled to mature in one year or less at June 30, 2008, totaled $211.4 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, 2008, we did not have brokered or internet time deposits.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2008 and 2007.

General.  Net income for the three months ended June 30, 2008 decreased $64,000 or 6.2% to $965,000 from $1,029,000 for the three months ended June 30, 2007. Net interest income increased $187,000, and non-interest income increased $11,000 during the three months ended June 30, 2008 compared to the same period in 2007. Return on equity for the three months ended June 30, 2008 was 9.86% compared to 10.49% for the three month period ended June 30, 2007. Return on assets was 0.80% for quarter ended June 30, 2008 compared to 0.87% for the same period in the previous fiscal year.

Interest Income. Total interest income decreased by $578,000 to $7.5 million for the three months ended June 30, 2008, from $8.1 million for the three months ended June, 2007, due to lower yields partially offset by higher average loan balances. The decrease in yields was due to lower market interest rates generally. The average yield earned on interest-earning assets was 6.45% for the three months ended June 30, 2008 compared to 7.11% for the three months ended June 30, 2007.

Interest Expense.  Total interest expense decreased by $765,000 to $3.5 million for the quarter ended June 30, 2008, from $4.2 million for the quarter ended June 30, 2007. Interest on deposits decreased by $70,000 to $2.9 million for the quarter ended June 30, 2008 from $2.9 million for the quarter ended June 30, 2007 due to a decrease in the average rate paid partially offset by higher average deposit balances. Interest expense on borrowed money decreased by $695,000 to $597,000 for the quarter ended June 30, 2008 compared to the quarter ended June 30, 2007. A decrease in the average balance of borrowings from $99.0 million for the June 30, 2007 quarter to $89.6 million for the June 30, 2008 quarter, and a decrease in the average rate paid on borrowings from 5.22% to 2.66% for the same periods accounted for the decrease. The average rate paid on interest-bearing liabilities was 3.15% during the three months ended June 30, 2008 compared to 3.96% for the three months ended June 30, 2007.

Provision for Loan Losses.  The provision for loan losses increased by $17,000 to $152,000 for the three months ended June 30, 2008, from $135,000 for the three months ended June 30, 2007. The amount of the provision for loan losses for the quarter ended June 30, 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 June 30, 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 increased by $11,000 to $840,000 for the three months ended June 30, 2008, from $829,000 for the three months ended June 30, 2007 due primarily to an increase in service charges and fees on transaction accounts. 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 $267,000 to $3.2 million for the three months ended June 30, 2008 compared to the same period last year. The increase in noninterest expense resulted primarily from compensation related expenses due generally to merit increases.

Taxes.  Taxes decreased by $22,000 to $483,000 for the three months ended June 30, 2008, from $505,000 for the three months ended June 30, 2007. The effective tax rate increased from 32.9% for the June 30, 2007 quarter to 33.3% for the June 30, 2008 quarter.

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.

RECENT ACCOUNTING PRONOUNCEMENTS

In December 2007, the Financial Accounting Standards Board (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 the criteria for how an acquiring entity in a business combination recognizes the assets acquired and liabilities assumed in the transaction; establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination.  Acquisition related costs including finder's fees, advisory, legal, accounting valuation and other professional and consulting fees are required to be expensed as incurred.  SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and early implementation is not permitted. The Company does not expect the implementation to have a material impact on it’s consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No.160, “Noncontrolling Interests in Consolidated Financial Statements” (SFAS 160).  SFAS 160 requires the Company to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  This Statement is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Earlier adoption is prohibited.   The Company does not expect the implementation of SFAS 160 to have a material impact on its consolidated financial statements.

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

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.

ITEM 4T.  CONTROLS AND PROCEDURES

 An evaluation of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934 (the "Act")) as of June 30, 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 effect were effective in ensuring that the information required to be disclosed by the Company in the reports it files or submits under the Act is: (i) accumulated and communicated to the Company's management (including the Chief Executive Officer and Chief Financial Officer) in a timely manner and (ii) recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. In addition, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Act) that occurred during the quarter ended June 30, 2008, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

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 13, 2008	By:	/s/ R. Jerry Giles
		R. Jerry Giles Chief Financial Officer (Duly Authorized Officer)

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