UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~December~~June 3130, ~~2011~~2012.

[ ] 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) (Zip Code)

(540) 886-0796

(Issuer’s telephone number)

None (Former name, former address and former fiscal year, if changed since last report)

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

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

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

Large accelerated filer ☐o Accelerated filer ☐o Non-Accelerated filer ☐o Smaller reporting company ⊠x (do not check if a small reporting company)

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

Number of shares of common stock, par value $.01 per share, outstanding at the close of business on ~~February~~August 1410, 2012: 4,361,658.

COMMUNITY FINANCIAL CORPORATION

INDEX

PART I.	FINANCIAL INFORMATION
Item 1.	~~Consolidated~~ Financial Statements
	Consolidated Balance Sheets at December 31, 2011 (unaudited) and March 31, 2011	3
	Consolidated Balance Sheets at June 30, 2012 (unaudited) and March 31, 2012	1
	Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2011 and 2010 (unaudited)	4
	Consolidated Statements of Operations for the Three Months Ended June 30, 2012 and 2011 (unaudited)	2
	Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2011 and 2010 (Unaudited)	5
	Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011 (Unaudited)	3
	Notes to Unaudited Interim Consolidated Financial Statements	64
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2320
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	3531
Item 4.	Controls and Procedures	3531
PART II.	OTHER INFORMATION	3632
Signature Page		3735
Exhibit Index		3836

Part I. Financial Information

Item 1. Financial Statements

COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
	December 31,			March 31,
	June 30,			March 31,
	2011			2011
	2012			2012
	(Unaudited)
ASSETS
Cash (including interest-bearing deposits of approximately $3,685,383 and $4,118,603)	$	7,418,844		$	7,897,955
Cash (including interest-bearing deposits of approximately $1,066,026 and $2,910,622)	$	6,843,939		$	8,233,185
Securities
Held to maturity		8,447,000			2,198,000
Held to maturity (fair value of $17,344,335 and $11,343,500 respectively)		17,331,000			11,344,000
Available for sale, at fair value		38,647			38,647
Restricted investment in Federal Home Loan Bank stock, at cost		54,~~206~~601,300			5,~~561~~206,300
Loans receivable, net of allowance for loan losses of $9,685,340 and $7,845,950		449,891,359			478,292,834
Loans receivable, net of allowance for loan losses of $8,510,203 and $8,910,121		437,972,655			445,098,108
Real estate owned and repossessed assets, net of valuation allowance of $2,062,730 and $1,378,585		13,016,731			10,383,549
Real estate owned, net of valuation allowance of $1,894,378 and $2,502,944		7,543,843			9,259,432
Property and equipment, net		8,~~527~~322,~~827~~781			8,~~769~~430,~~146~~736
Bank owned life insurance		6,839,954			6,781,869
Accrued interest receivable
Loans		1,~~887~~721,~~393~~233			21,~~024~~757,~~571~~001
Investments		2535,~~543~~153			1236,~~068~~610
Prepaid expenses and other assets		157,~~044~~240,~~129~~286			147,~~901~~721,~~933~~063
Total Assets	$	~~509~~498,~~503~~490,~~773~~791		$	~~530~~503,~~080~~906,~~003~~951
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits	$	~~363~~368,~~045~~082,~~450~~721		$	~~379~~372,~~044~~417,~~783~~944
Borrowings		9376,000,000			9778,000,000
Securities sold under agreement to repurchase		---			1,444,961
Advance payments by borrowers for taxes and insurance		138,692			268,465
Advance payments by borrowers for taxes and insurance		160,865			212,425
Other liabilities		2,807,168			2,817,936
Other liabilities		3,275,125			2,617,440
Total Liabilities		447,028,581			453,504,345
Total Liabilities		459,481,440			480,319,609
Stockholders’ Equity
Preferred stock $.01 par value, authorized 3,000,000 shares, 12,643 shares outstanding		12,643,000			12,643,000
Preferred stock $.01 par value, $1,000 liquidation
preference, authorized 3,000,000
shares, 12,643 shares outstanding		12,643,000			12,643,000
Common stock, $0.01 par value, authorized 10,000,000 shares, 4,361,658 shares outstanding		43,617			43,617
Warrants		603,153			603,153
Discount on preferred stock		(~~237~~176,~~224~~906	)		(~~327~~207,~~701~~065	)
Additional paid in capital		5,599,052			5,599,052
Retained earnings		3234,~~200~~123,~~371~~825			3233,~~028~~094,~~909~~380
Accumulated other comprehensive (loss)		(~~829~~1,~~636~~373,531	)		(~~829~~1,~~636~~373,531	)
Total Stockholders’ Equity		5051,~~022~~462,~~333~~210			4950,~~760~~402,~~394~~606
Total Liabilities and Stockholders’ Equity	$	~~509~~498,~~503~~490,~~773~~791		$	~~530~~503,~~080~~906,~~003~~951

See accompanying notes to unaudited interim consolidated financial statements.

COMMUNITY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

Three Months Ended

~~Nine Months Ended~~

December 31,

June 30,

2011

2010

2011

2010

2012

2011

(Unaudited)

~~(Unaudited)~~

INTEREST INCOME

Loans

65,~~392~~991,~~944~~735

6,~~664~~821,~~906~~445

~~19,774,587~~

~~20,620,810~~

Investment securities

3550,~~459~~214

89,~~158~~467

~~66,033~~

~~29,685~~

Other

4960,~~783~~118

4678,~~163~~799

~~169,365~~

~~159,485~~

Total interest income

6,~~478~~102,~~186~~067

6,~~719~~909,~~227~~711

~~20,009,985~~

~~20,809,980~~

INTEREST EXPENSE

Deposits

~~762~~632,~~365~~285

1954,~~192,466~~227

~~2,578,066~~

~~3,872,066~~

Borrowed money

3947,~~711~~451

~~206~~45,~~877~~164

~~123,457~~

~~637,648~~

Total interest expense

~~802~~679,~~076~~736

1999,~~399,343~~391

~~2,701,523~~

~~4,509,714~~

NET INTEREST INCOME

5,~~676~~422,~~110~~331

5,~~319~~910,~~884~~320

~~17,308,462~~

~~16,300,266~~

PROVISION FOR LOAN LOSSES

3184,~~046,880~~412

1706,~~776,054~~253

~~4,876,154~~

~~5,547,897~~

NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES

25,~~629~~237,~~230~~919

35,~~543~~204,~~830~~067

~~12,432,308~~

~~10,752,369~~

NONINTEREST INCOME

Service charges, fees and commissions

~~844~~811,~~085~~885

1862,~~001,354~~111

~~2,588,275~~

~~2,882,162~~

Other

9095,~~114~~929

95112,~~882~~157

~~288,406~~

~~267,434~~

Total noninterest income

~~934~~907,~~199~~814

1974,~~097,236~~268

~~2,876,681~~

~~3,149,596~~

NONINTEREST EXPENSE

Compensation & benefits

2,~~371~~237,~~197~~589

2,~~391~~414,~~196~~502

~~7,184,608~~

~~6,906,343~~

Occupancy

~~417~~403,~~196~~737

~~385~~407,~~931~~191

~~1,236,617~~

~~1,188,246~~

Data processing

~~395~~397,~~683~~127

~~330~~443,~~746~~716

~~1,281,735~~

~~1,127,144~~

Federal insurance premium

~~113~~108,~~857~~444

~~159~~119,~~735~~587

~~303,621~~

~~505,231~~

Advertising

~~142~~152,~~979~~901

~~117~~102,~~373~~765

~~341,687~~

~~371,421~~

Real estate owned and collection

~~582~~353,~~473~~346

~~782~~1,~~412~~517,827

~~2,784,669~~

~~1,752,288~~

Other

~~415~~492,~~257~~374

~~421~~321,~~613~~064

~~1,090,391~~

~~1,317,088~~

Total noninterest expense

4,~~438~~145,~~642~~518

45,~~589~~326,~~006~~652

~~14,223,328~~

~~13,167,761~~

INCOME (LOSS) BEFORE TAXES

(875,213

)

52,060

1,085,661

734,204

INCOME BEFORE TAXES

2,000,215

851,683

INCOME TAX EXPENSE (BENEFIT)

(354,088

)

24,665

349,609

244,332

INCOME TAX EXPENSE

782,573

303,684

NET INCOME (LOSS)

(521,125

)

27,395

736,052

489,872

NET INCOME

1,217,642

547,999

Effective Dividend on Preferred Stock

188,197

~~564,590~~

NET INCOME (LOSS) AVAILABLE TO COMMON STOCKHOLDERS

(709,322

)

(160,802

)

171,462

(74,718

)

NET INCOME AVAILABLE TO COMMON STOCKHOLDERS

1,029,445

359,802

BASIC EARNINGS (LOSS) PER COMMON SHARE

(0.16

)

(0.04

)

0.04

(0.02

)

BASIC EARNINGS PER COMMON SHARE

0.24

0.08

DILUTED EARNINGS (LOSS) PER COMMON SHARE

(0.16

)

(0.04

)

0.04

(0.02

)

DILUTED EARNINGS PER COMMON SHARE

0.24

0.08

DIVIDENDS PER COMMON SHARE

0.00

~~0.00~~

See accompanying notes to unaudited interim consolidated financial statements.

COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
	Nine Months Ended
	Three Months Ended
	December 31,
	June 30,
	2011			2010
	2012			2011
	(Unaudited)			(Unaudited)
OPERATING ACTIVITIES
Net income	$	~~736~~1,~~052~~217,642		$	~~489~~547,~~872~~999
Adjustments to reconcile net income to
net cash provided by operating activities
Provision for loan losses		4184,~~876,154~~412			5706,~~547,897~~253
Losses/impairment on foreclosed assets		2,233,274			~~---~~1,105,538
Depreciation		~~478~~147,~~142~~297			~~469~~157,~~918~~463
Decrease in net deferred loan fees		(~~3,400~~916	)		(1611,~~500~~868	)
Deferred income tax (benefit) expense		(86,725	)		1,006,089
Deferred income tax (benefit)		(841,841	)		(30,677	)
(Increase) decrease in other assets		(18518,~~492~~002	)		~~608~~115,~~198~~466
Increase in other liabilities		606,125			451,090
(Decrease) in other liabilities		(140,541	)		(66,349	)
Net cash provided by operating activities		82,~~821~~281,~~130~~325			82,~~556~~523,~~564~~825
INVESTING ACTIVITIES
Proceeds from maturities of held to maturity securities		63,~~500~~000,000			21,~~500~~000,000
Purchase of held to maturity securities		(128,~~749~~987,000	)		(2,500,000	)
Proceeds from sale of available for sale securities		---			34,488
Net decrease in loans		8,624,902			2,979,683
Net decrease in loans		13,266,257			7,100,948
Purchases of property and equipment		(39,341	)		(87,105	)
Purchases of property and equipment		(220,288	)		(307,424	)
Redemption of FHLB stock		605,000			157,400
Redemption of FHLB stock		355,000			622,300
Improvement to real estate owned		(24,370	)		(62,679	)
Improvement to real estate owned		(181,866	)		---
Proceeds from sale of real estate owned		2,433,729			2,502,511
Proceeds from sale of real estate owned		5,648,063			2,666,393
Net cash provided by investing activities		5,612,920			3,989,810
Net cash provided by investing activities		12,618,166			10,116,705
FINANCING ACTIVITIES
Dividends paid		(~~474~~158,~~113~~038	)		(~~474~~158,~~113~~038	)
Net (decrease) in deposits		(157,~~999~~125,~~333~~453	)		(127,~~290~~948,~~994~~519	)
(Repayment of) proceeds from advances and other borrowed money		(52,~~444~~000,~~961~~000	)		(7896,~~747,732~~366	)
Net cash (used in) financing activities		(219,~~918~~283,~~407~~491	)		(207,~~512~~210,~~839~~191	)
INCREASE(DECREASE)IN CASH AND CASH EQUIVALENTS		(~~479~~1,~~111~~389,246	)		(696,556	)
CASH AND CASH EQUIVALENTS – beginning of period		78,~~897~~233,~~955~~185			57,~~374~~897,~~665~~955
CASH AND CASH EQUIVALENTS – end of period	$	76,~~418~~843,~~844~~939		$	46,~~678~~643,~~109~~083
Supplemental Schedule of Non-Cash Investing and Financing Activities
Supplemental Schedule of Non-Cash
Transfers from loans to real estate acquired through foreclosure	$	8,769,084		$	---
Investing and Financing Activities
Transfers from loans to real estate acquired through foreclosure	$	969,780		$	2,348,333

See accompanying notes to unaudited interim consolidated financial statements

COMMUNITY FINANCIAL CORPORATION

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

~~DECEMBER~~JUNE 3130, ~~2011~~2012

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 ~~and nine~~ months ended ~~December~~June 3130, ~~2011~~2012 are not necessarily indicative of the results that may be expected for the year ending March 31, ~~2012~~2013.

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

On July 21, 2010, the President signed into law the Dodd-Frank Wall Street Reform Act. The Dodd-Frank Act imposed new restrictions and an expanded framework of regulatory oversight for financial institutions, including depository institutions. In addition, the new law changed the jurisdictions of existing bank regulatory agencies and in particular transfers the regulation of federal savings associations from the Office of Thrift Supervision to the Office of Comptroller of the Currency, effective July 21, 2011. At the same time, responsibility for regulation of savings and loan holding companies was transferred to the Board of Governors of the Federal Reserve System (Federal Reserve).

NOTE 2. - STOCK-BASED COMPENSATION PLAN

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

There were no stock options granted and no stock-based compensation expense was recognized during the three ~~and nine~~ month ~~periods~~period ended ~~December~~June 3130, ~~2011~~2012.

The following summarizes the stock option activity for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012:

					Weighted	~~Weighted~~Intrinsic		~~Intrinsic~~
	Weighted				Average	~~Average~~Value of		~~Value of~~
	Average				Remaining	~~Remaining~~Unexercised		~~Unexercised~~
	Exercise				Contractual	~~Contractual~~In-the-Money		~~In-the-Money~~
	Shares		Price		Term	~~Term~~Options		~~Options~~
Options outstanding, March 31, 2011		255,900	$	9.06
Options outstanding, March 31, 2012		243,900	$	9.23
Granted		---		---
Exercised		---		---
Forfeited		~~---~~6,000		~~---~~10.01
Options outstanding December 31, 2011		255,900		9.06			3.2
Options outstanding June 30, 2012		237,900		9.21	3.4
Options exercisable, December 31, 2011		255,900	$	9.06			3.2	$---
Options exercisable, June 30, 2012		237,900	$	9.21	3.4	---

There were no options exercised during the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012.

NOTE 3. - EARNINGS PER SHARE

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

	For the Three Months Ended
	December 31, 2011								December 31, 2010
	June 30, 2012								June 30, 2011
				Weighted Average		Per Share						Weighted Average		Per Share
	Income			Shares		Amount			Income			Shares		Amount
Basic (loss) per common share:
Basic per common share:
(Loss) available to common stockholders	$	(709,322	)		4,361,658	$	(0.16	)	$	(160,802	)		4,361,658	$	(0.04	)
Income available to common stockholders	$	1,029,445			4,361,658	$	0.24		$	359,802			4,361,658	$	0.08
Diluted (loss) per common share:
Diluted earnings per common share:
Effect of Dilutive Securities
Options and Warrants		---			~~---~~3,563					---			~~---~~63,903
(Loss) available to common stockholders	$	(709,322	)		4,361,658	$	(0.16	)	$	(160,802	)		4,361,658	$	(0.04	)
Income available to common stockholders	$	1,029,445			4,365,221	$	0.24		$	359,802			4,425,561	$	0.08

During the quarter ended ~~December~~June 3130, ~~2011~~2012, ~~255~~217,900 stock options and 351,194 warrants were excluded in the calculation of earnings per share because they would have been anti-dilutive. During the quarter ended ~~December~~June 3130, ~~2010~~2011, ~~296~~165,700 stock options and 351,194 warrants were excluded in the calculation of earnings per share because they would have been anti-dilutive.

	For the Nine Months Ended
	December 31, 2011						December 31, 2010
			Weighted Average		Per Share					Weighted Average		Per Share
	Income		Shares		Amount		Income			Shares		Amount
Basic earnings per share:
Income (loss) available to common stockholders	$	171,462		4,361,658	$	0.04	$	(74,718	)		4,361,658	$	(0.02	)
Diluted earnings (loss) per share:
Effect of Dilutive Securities
Options and Warrants		---		21,301				---			---
Income (loss) available to common stockholders	$	171,462		4,382,959	$	0.04	$	(74,718	)		4,361,658	$	(0.02	)

NOTE 4. - STOCKHOLDERS' EQUITY

~~The~~On ~~following~~July ~~table~~17, ~~presents~~2012, the OCC imposed an individualized minimum capital requirement (“IMCR”) on the Bank', increasing its minimum leverage capital ratio from 4.0% to 8.5% and its total risk-based capital ratio from 8.0% to 12.5%, because of the Bank’s ~~regulatory~~condition and risk profile. As noted below, the Bank’s capital levels at ~~December~~June 3130, ~~2011:~~2012, exceeded the ratios required by the IMCR. In addition to these minimum capital requirements, the Bank is required to have the capital ratios noted below to be deemed well-capitalized under the OCC prompt corrective action regulations. The Bank was well-capitalized at June 30, 2012. The Bank’s regulatory capital is characterized as “well capitalized” due to the issuance of preferred stock under the U.S. Treasury Capital Purchase Program. The Company received $12,643,000 from the U.S. Treasury through the sale of 12,643 shares of preferred stock. The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares of common stock at $5.40 per share. The preferred shares pay a cumulative dividend of 5% per year for the first five years and 9% per year thereafter. The preferred shares are redeemable at any time by the Company at 100% of the issue price, subject to the approval of the Company’s and the Bank’s federal regulators.

	Well Capitalized Amount Required		Well Capitalized Percent Required			Actual Amount		Actual Percent			Excess Amount
Tangible Capital	$	25,575,000		5.00	%	$	49,633,000		9.70	%	$	24,058,000
Core Capital		30,690,000		6.00			49,633,000		9.70			18,943,000
Risk-based Capital		42,892,000		10.00			55,018,000		12.83			12,126,000

The ~~Company’s~~following ~~primary~~table ~~source~~presents ~~of funds for~~ the ~~payment of dividends to its stockholders is dividends from the~~ Bank.’s ~~Capital~~regulatory distributions by OCC-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~~ratios ~~during~~at aJune 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 require prior OCC approval. The Capital Distribution Regulation requires that savings banks in holding company structures provide the applicable OCC 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 OCC may object to capital distributions if the bank is not meeting its regulatory capital requirements, the distribution raises safety and soundness concerns or is otherwise in violation of law. Issuance of preferred stock under the TARP Capital Purchase Plan restricted the Company from paying dividends to stockholders without approval from the OCC and U.S Treasury. This restriction expired on December 31, 2011.2012:

	Actual Capital Levels					Minimum Required at Capital Levels					Minimum Required Capital Levels Under the IMCR4					Minimum Capital Levels to be Deemed Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in thousands)
Leverage Capital1	$	51,703		10.30	%	$	20,079		4.0	%	$	42,668		8.5	%	$	25,099		5.0	%
Tier 1 Risk-Based Capital2	$	51,703		12.34	%		N/A		N/A			N/A		N/A		$	25,143		6.0	%
Total Risk-Based Capital3	$	56,959		13.59	%	$	33,524		8.0	%	$	52,382		12.5	%	$	41,905		10.0	%

_______________________________________________________

1.	Tier 1 Capital to Total Assets of $502.0 million.
2.	Tier 1 Capital to Risk-Weighted Assets of $419.1 million.
3.	Total Capital to Risk-Weighted Assets of $419.1 million.
4.	The IMCR was not effective until July 17, 2012.

The Company’s primary source of funds for the payment of dividends to its common and preferred stockholders is dividends received from the Bank. Under a written agreement between the OCC and the Bank, the Bank must receive OCC approval before paying a dividend to the Company. In addition, under the Agreement and Plan of Merger with City Holding Company described in Note 12 - Subsequent Events, the Company has agreed not to pay dividends to common stockholders pending the consummation of the acquisition.

NOTE 5. - SUPPLEMENTAL INFORMATION - STATEMENT OF CASH FLOWS

Total interest paid for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011 was $2686,~~721,069~~ 367 and $41,~~509~~013,~~192~~743, respectively. Total income taxes paid for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~ 2012 and ~~2010~~2011 was $~~827,494~~0 and $066,440.

NOTE 6. - COMPREHENSIVE INCOME

Comprehensive income is defined as "the change in equity (net assets) of a business enterprise during a period from transactions and other events and circumstances from non-owner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners." Comprehensive income for the Company includes net income, unrealized gains and losses on securities available for sale and pension liability adjustments. For the ~~nine~~three-month periods ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011, net income and comprehensive income were the same.

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
	December 31,
	June 30,
	2011			2010
	2012			2011
Service cost	$	8492,~~662~~944		$	7684,~~565~~662
Interest cost		6878,~~629~~503			5968,~~549~~629
Expected return on plan assets		(7079,~~980~~680	)		(6170,~~538~~980)	)
Recognized net actuarial loss		1417,~~153~~318			414,~~941~~153
	$	96109,~~464~~085		$	7996,~~517~~464

	Nine Months Ended
	December 31,
	2011			2010
Service cost	$	253,986		$	229,695
Interest cost		205,887			178,647
Expected return on plan assets		(212,940	)		(184,614	)
Recognized net actuarial loss		42,459			14,823
	$	289,392		$	238,551

The Company made a contribution of $~~232~~550,~~288~~595 to the plan during the June 30, ~~2010~~2012 quarter for the fiscal year ended March 31, ~~2011~~2012. The Company anticipates making all contributions for the current fiscal year prior to March 31, ~~2012~~2013.

NOTE 8. – SECURITIES

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

Securities

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

December 31, 2011
June 30, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Held to Maturity
United States government and
agency obligations	$	813,000,000	$	2515,~~995~~595	$	-2,260	$	813,~~025~~013,~~995~~335
Other		~~447~~4,331,000		-		-		~~447~~4,331,000
		8,447,000				-		8,472,995
		17,331,000		15,595		2,260		17,344,335
Available for Sale
Equity securities		38,647		-		-		38,647
	$	817,~~485~~369,647	$	2515,~~995~~595	$	-2,260	$	817,~~511~~382,~~642~~982

March 31, 2011
March 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Estimated Market Value
			Gross		Gross		Estimated
	Amortized		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Held to Maturity
United States government and
agency obligations	$	210,000,000	$	-17,430	$	3317,~~680~~900	$	19,~~966~~999,~~320~~530
Other		~~198~~1,344,000		-		-		~~198~~1,344,000
		2,198,000		-		33,680		2,164,320
		11,344,000		17,430		17,900		11,343,530
Available for Sale
Equity securities		38,647		-		-		38,647
	$	211,~~236~~382,647	$	-17,430	$	3317,~~680~~900	$	211,~~202~~382,~~967~~177

10United States government and agency obligations. The unrealized gain or loss on the investments in direct obligations of U.S. government agencies was caused by interest rate increases or decreases. The contractual terms of these investments do not permit the issuer to settle at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at June 30, 2012. Three securities were in a loss position at June 30, 2012.

United States government and agency obligations. The unrealized gain or loss on the investments in direct obligations of U.S. government agencies was caused by interest rate increases or decreases. The contractual terms of these investments do not permit the issuer to settle at a price less than the amortized cost basis of the investment. Because the Company does not intend to sell these investments and it is not more likely than not that the Company will be required to sell the investment before recovery of the amortized cost basis, which may be maturity, the Company does not consider these investments to be other-than-temporarily impaired at December 31, 2011. No securities were in a loss position at December 31, 2011.7

The Company's investment in ~~FHLB~~Federal Home Loan Bank (“FHLB”) stock totaled $54,~~206~~601,300 at ~~December~~June 3130, ~~2011~~2012. FHLB stock is generally viewed as a long-term investment and as a restricted security, which is carried at cost, because there is no market for the stock, other than the FHLBs or member institutions. Therefore, when evaluating FHLB stock for impairment, its value is based on the ultimate recoverability of the par value rather than by recognizing temporary declines in value. We do not consider this investment to be other-than-temporarily impaired at ~~December~~June 3130, ~~2011~~2012 and no impairment has been recognized. FHLB stock is shown in restricted investments on the balance sheet and is not part of the AFS securities portfolio.

NOTE 9. - FAIR VALUE MEASUREMENTS

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

· Level 1	Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.

· Level 2	Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the assets or liability, either directly or indirectly, for substantially the full term of the financial instrument.

· Level 3	Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

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

Securities Available for Sale. 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.

~~Where~~The ~~quoted~~following ~~prices~~table ~~are~~presents ~~available~~the inbalances ~~an active market, securities are classified within level 1~~ of ~~the~~financial ~~valuation~~assets ~~hierarchy.~~measured ~~Level~~at ~~1 securities would include highly liquid government bonds, mortgage products and exchange traded equities. If quoted market prices are not available, then~~ fair ~~values~~value ~~are~~on ~~estimated~~a byrecurring ~~using~~basis ~~pricing~~as ~~models, quoted prices~~ of ~~securities~~June ~~with similar characteristics~~30, 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.2012:

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets
June 30, 2012
Equity securities	$	38,647	$	-	$	38,647	$	-

March 31, 2012
Equity securities	$	38,647	$	-	$	38,647	$	-

The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:

			Fair Value Measurements Using
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets
December 31, 2011
Equity securities	$	38,647	$	-	$	38,647	$	-
March 31, 2011
Equity securities	$	38,647	$	-	$	38,647	$	-

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

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

Impaired loans

Generally accepted accounting principles apply to loans measured for impairment using practical expedients, including impaired loans measured at an observable market price (if available), or at the fair value of the loan’s collateral (if the loan is collateral dependent). Fair value of the loan’s collateral, when the loan is dependent on collateral, is determined by appraisals or independent valuation which is then adjusted for the cost related to liquidation of the collateral. The fair value of a Level 2 collateral dependent loan is generally determined by a recent appraisal in the last twelve months. The fair value of a Level 3 collateral dependent loan is determined by reference to an appraisal older than twelve months in addition to cash flow analysis and/or other market evaluations.

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

	Carrying Value
Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets
December 31, 2011
Impaired loans net of valuation allowance	$	4,287,576	$	--	$	1,136,812	$	3,150,764
March 31, 2011
Impaired loans net of
Valuation allowance	$	4,198,191	$	--	$	4,160,712	$	37,479

in determining fair value. The delay between ordering and receiving an appraisal and our historical experience that real estate values do not generally fluctuate significantly quarter to quarter are factors influencing this decision. Updated appraisals are obtained periodically and in those instances where management has reason to believe a material change may have occurred in the fair value of the collateral. Evaluation of impairment requires judgment and estimates, and management uses all relevant and timely information available to determine specific reserves on impaired loans, including appraisals and cash flow analysis. Loans are partially or completely charged off in the period when they are deemed uncollectible in accordance with ASC 310-35.

Other real estate owned

Certain assets such as other real estate owned (OREO) are measured at the lesser of cost or fair value less cost to sell. The fair value of Level 2 collateral dependent real estate is generally determined by a recent appraisal in the last twelve months. The fair value of Level 3 collateral dependent real estate is determined by reference to an appraisal older than twelve months in addition to cash flow analysis and/or other market evaluations.

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

	~~Carrying Value~~		Carrying Value
Description	Balance		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
			Assets		Inputs		Inputs
Description	Balance		(Level 1)		(Level 2)		(Level 3)
Assets
December 31, 2011
June 30, 2012
Real estate owned	$	13,016,731	$	--	$	11,727,992	$	1,288,739
Impaired loans net of
March 31, 2011
valuation allowance	$	6,234,174	$	-	$	5,196,305	$	1,037,869
Real estate owned	$	7,543,843	$	-	$	2,939,851	$	4,603,992
Valuation allowance	$	10,383,549	$	--	$	8,988,875	$	1,394,674
March 31, 2012
Impaired loans net of
valuation allowance	$	4,675,569	$	-	$	1,582,600	$	3,092,969
Real estate owned	$	9,259,432	$	-	$	6,697,877	$	2,561,555

The changes in Level 3 assets measured at estimated fair value on a nonrecurring basis during the period ended June 30, 2012 were as follows:

	Fair Value Measurements at June 30, 2012
	Impaired			Other Real
	Loans			Owned
Balance April 1, 2012	$	3,092,969		$	2,561,555
Total gains (losses) realized/unrealized
included in earnings (write downs)		(134,216	)		(70,324	)
Newly impaired/New OREO		204,316			---
Sales		(85,200	)		(537,820	)
Settlements/Foreclosures/Payoffs		(25,000	)		---
Transfers into Level 3		---			2,996,581
Transfers out of Level 3		(2,015,000	)		(346,000	)
Balance June 30, 2012	$	$1,037,869		$	4,603,992

The following table displays quantitative information about Level 3 Fair Value Measurements for June 30, 2012.

	Quantitative information about Level 3 Fair Value Measurements for June 30, 2012

					Range
	Fair		Valuation	Unobservable	Weighted
	Value		Technique(s)	Input	Average
Assets

Impaired loans	$	167,701	Discounted Appraised Value	Selling cost	5%-10%(6)%

	$	884,068	Internal Evaluations

Other real estate owned	$	4,603,992	Discounted	Selling cost	5%-10%(6%)

The Company uses real estate appraisals to value impaired loans and future cash flows or other appropriate methods to determine fair value. Real estate appraisals used to determine fair value for impaired loans secured by real estate as of June 30, 2012 had been obtained on Level 2 loans within the last twelve months and Level 3 loans within the last nineteen months. With the use of these methods, we provide valuation allowances for anticipated losses when management determines that a decline in the value of the collateral or expected cash flows has occurred. The Company does not generally believe obtaining real estate appraisals as frequently as quarterly is of significant value in determining fair value. The delay between ordering and receiving an appraisal and our historical experience that real estate values do not generally fluctuate significantly quarter to quarter are factors influencing this decision. Updated appraisals are obtained periodically and in those instances where management has reason to believe a material change may have occurred in the fair value of the collateral. Evaluation of impairment requires judgment and estimates, and management uses all relevant and timely information available to determine specific reserves on impaired loans, including appraisals and cash flow analysis. Loans are partially or completely charged off in the period when they are deemed uncollectible in accordance with ASC 310-35.

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

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

Cash and cash equivalents

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

Securities

Fair values for securities, excluding ~~Federal Home Loan Bank (“~~FHLB”) stock, are based on quoted market prices or dealer quotes. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The carrying value of ~~Federal~~FHLB ~~Home Loan Bank~~ stock approximates fair value based on the redemption provisions of the ~~Federal~~FHLB ~~Home~~stock ~~Loan Bank~~ and is therefore not included in the following table. The Company’s investment in ~~Federal~~FHLB ~~Home loan Bank~~ stock totaled $54.26 million at ~~December~~June 3130, ~~2011~~2012. FHLB stock is generally viewed as a long term investment and as a restricted investment security which is carried at cost.

Loans receivable

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

1310

other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for other loans (e.g., commercial real estate and investment property mortgage loans, commercial and industrial loans) are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality. Fair values for non-performing loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposit liabilities

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

Borrowings

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

Securities sold under agreements to repurchase

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

Accrued interest

The carrying amounts of accrued interest approximate fair value.

Off-balance sheet instruments

The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present credit worthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair value of standby letters of credit is based on fees currently charged for similar agreements or on the estimated cost to terminate them or otherwise settle the obligations with the counterparties at the reporting date. At ~~December~~June 3130, ~~2011~~2012 and March 31, ~~2011~~2012, the fair value of loan commitments and standby letters of credit were deemed immaterial.

14The estimated fair values of the Company’s financial instruments are as follows (in thousands):

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

			Fair Value Measurements at June 30, 2012 using

			Quoted Prices
			in Active		Significant
			Markets for		Other		Significant
			Identical		Observable		Unobservable
	Carrying		Assets		Inputs		Inputs		Fair
	Value		(Level 1)		(Level 2)		(Level 3)		Value
FINANCIAL ASSETS:
Cash and due from banks	$	6,843	$	6,843	$	--	$	--	$	6,843
Securities		17,370				17,383				17,383
FHLB restricted stock		4,601				4,601				4,601
Loans, net		437,973				427,256		1,052		428,308
Accrued interest receivable		1,756				1,756				1,756
Bank owned life insurance		6,840				6,840				6,840

FINANCIAL LIABILITIES:
Deposits
Non-interest bearing demand deposits		38,866				38,490				38,490
Interest bearing deposits		329,217				330,381				330,381
Borrowings		76,000				75,992				75,992
Accrued interest payable		23				23				23

	December 31, 2011				March 31, 2011
	Carrying		Fair		Carrying		Fair
(In Thousands)	Amount		Value		Amount		Value
Financial assets
Cash and cash equivalents	$	7,419	$	7,419	$	7,898	$	7,898
Securities		8,486		8,512		2,237		2,203
Loans, net		449,891		461,914		478,293		490,657
Accrued interest receivable		1,913		1,913		2,037		2,037
Financial liabilities
Deposits		363,045	$	363,621	$	379,045	$	382,055
Borrowings		93,000		92,987		97,000		96,998
Securities sold under agreements to repurchase		---		---		1,445		1,445
Accrued interest payable		31		31		50		50

Note 10. - Loans Receivable, Net

Loans receivable are summarized as follows:

	December 31, 2011			March 31, 2011
	June 30, 2012			March 31, 2012
Residential	$	183,~~296~~062,~~103~~596		$	~~195~~182,~~128~~430,~~796~~665
Commercial - real estate		~~175~~131,~~655~~554,~~420~~776			~~181~~137,~~822~~562,~~323~~743
Construction		17,365,952			20,649,944
Construction and land development		43,391,541			50,113,695
Commercial – non real estate		4754,~~935~~335,~~166~~834			4948,~~085~~618,~~530~~808
Consumer – non real estate		3433,~~651~~440,~~144~~349			3834,~~721~~583,~~182~~824
		458,903,785			485,407,775
		445,785,096			453,309,735
Less:
Deferred loan (costs), net		(~~672~~697,~~914~~762	)		(~~731~~698,~~009~~494	)
Allowance for loan losses		98,~~685~~510,~~340~~203			78,~~845~~910,~~950~~121
		9,012,425			7,114,941
		7,812,441			8,211,627
	$	~~449~~437,~~891~~972,~~359~~655		$	~~478~~445,~~292~~098,~~834~~108

Loans serviced for others amounted to approximately $~~142~~133,~~625~~720 at ~~December~~June 3130, ~~2011~~2012, and $~~211~~138,~~616~~129 at March 31, ~~2011~~2012. ~~The~~These loans serviced for others are not included in the accompanying consolidated balance sheets.

Allowance for loan losses is summarized as follows:

	Nine Months Ended December 31, 2011			Year Ended March 31, 2011
	Three Months Ended			Year Ended
Balance at beginning of period	$	7,845,950		$	8,052,875
	June 30, 2012			March 31, 2012
Provision for loan loss		4,876,154			8,170,534
Balance at beginning of period	$	8,910,121		$	7,845,950
Loans charged-off		(3,165,788	)		(8,721,350	)
Provision for loan loss		184,412			4,908,198
Recoveries of loans previously charged off		129,024			343,891
Loans charged-off		(674,169	)		(4,026,264	)
Balance at end of period	$	9,685,340		$	7,845,950
Recoveries of loans previously charged off		89,839			182,237
Balance at end of period	$	8,510,203		$	8,910,121

~~During~~Beginning with the quarter ended December 31, 2011, the Bank ~~instituted~~has used an enhanced approach to assessing the qualitative factors related to the calculation of general reserves to recognize the increased levels of non-performing assets and current economic conditions.

The allowance for loan losses allocated by segment is as follows:

Nine Months Ended December 31, 2011

Three Months Ended June 30, 2012

Commercial – Non Real Estate

Commercial – Real Estate

Construction

Consumer – Non Real Estate

Residential

Total

Commercial –

Construction and

Non Real

Commercial –

Land

Consumer – Non

Estate

Real Estate

Development

Real Estate

Residential

Total

Allowance for Loan Losses:

Beginning Balance

991,~~408~~332,392

2566,~~223,090~~317

~~549~~1,~~393~~802,771

~~352~~498,~~948~~687

4,~~621~~709,~~111~~954

78,~~845~~910,~~950~~121

Provision

1233,~~346,424~~926

~~(22~~1,~~981~~208,701

)

(~~184~~269,~~708~~188

)

~~312~~56,~~445~~553

3(1,~~424~~045,~~974~~579

)

4184,~~876,154~~413

Charged off

(125,979

)

(565,307

)

---

(137,698

)

(2,336,804

)

(3,165,788

)

Chargedoff

(103,080

)

---

(82,469

)

(90,091

)

(398,530

)

(674,170

)

Recoveries

~~2,900~~300

~~5,043~~---

~~---~~56,772

9322,~~512~~320

2710,~~569~~447

~~129~~89,~~024~~839

Ending Balance

1,~~322~~463,~~753~~538

1,~~639~~775,~~845~~018

~~364~~1,~~685~~507,886

~~621~~487,~~207~~469

53,~~736~~276,~~850~~292

98,~~685~~510,~~340~~203

Individually evaluated for impairment

~~578~~563,~~191~~185

~~238~~664,~~371~~291

~~---~~67,744

9471,~~170~~515

1454,~~192,990~~437

21,~~103~~821,~~722~~172

Collectively evaluated for impairment

~~744~~900,~~562~~353

1,~~401~~110,~~474~~727

~~364~~1,~~685~~440,142

~~527~~415,~~037~~954

42,~~543~~821,~~860~~855

76,~~581~~689,~~618~~031

Loans:

Individually evaluated for impairment

1,~~713~~458,~~353~~186

1310,~~005~~386,~~872~~542

~~966~~2,~~195~~600,182

~~343~~183,~~754~~137

11,~~883~~930,~~521~~362

2726,~~912~~558,~~695~~409

Collectively evaluated for impairment

4652,~~221~~877,~~813~~648

~~162~~121,~~649~~168,~~548~~234

1640,~~399~~791,~~757~~359

3433,~~307~~257,~~390~~212

171,~~412~~132,~~582~~234

~~430~~419,~~991~~226,~~090~~687

Ending Balance:

4754,~~935~~335,~~166~~834

~~175~~131,~~655~~554,~~420~~776

1743,~~365~~391,~~952~~541

3433,~~651~~440,~~144~~349

183,~~296~~062,~~103~~596

~~458~~445,~~903,~~785,096

~~The allowance for loan losses allocated by segment is as follows:~~12

Year Ended March 31, 2011
Year Ended March 31, 2012
	Commercial – Non Real Estate			Commercial – Real Estate			Construction			Consumer – Non Real Estate			Residential			Total
	Commercial –						Construction			Consumer –
	Non Real			Commercial –			and Land			Non Real
	Estate			Real Estate			Development			Estate			Residential			Total
Allowance for Loan Losses:
Individually evaluated for impairment	$	68,695		$	257,770		$	---		$	16,541		$	1,707,734		$	2,050,740
Beginning Balance	$	99,408		$	2,223,090		$	549,393		$	352,948		$	4,621,111		$	7,845,950
Collectively evaluated for impairment		30,713			1,965,320			549,393			336,407			2,913,377			5,795,210
Provision		1,589,086			(1,450,445	)		1,397,349			227,148			3,145,060			4,908,198
Ending Balance:	$	99,408		$	2,223,090		$	549,393		$	352,948		$	4,621,111		$	7,845,950
Chargedoff		(364,344	)		(206,328	)		(144,509	)		(189,741	)		(3,121,342	)		(4,026,264	)
Recoveries		8,242			---			538			108,332			65,125			182,237
Ending Balance	$	1,332,392		$	566,317		$	1,802,771		$	498,687		$	4,709,954		$	8,910,121
Individually evaluated for impairment	$	566,942		$	116,583		$	140,900		$	77,666		$	608,969		$	1,511,060
Collectively evaluated for impairment		765,450			449,734			1,661,871			421,021			4,100,985			7,399,061
Loans:
Individually evaluated for impairment	$	41,~~015~~571,~~871~~433		$	1411,~~454~~697,~~363~~126		$	~~321~~3,~~114~~319,004		$	~~255~~455,~~650~~411		$	1610,~~139~~143,~~000~~625		$	3527,~~185~~186,~~998~~599
Collectively evaluated for impairment		4547,~~069~~047,~~659~~375			~~167~~125,~~367~~865,~~960~~617			2046,~~328~~794,~~830~~691			3834,~~465~~128,~~532~~413			~~178~~172,~~989~~287,~~796~~040			~~450~~426,~~221~~123,~~777~~136
Ending Balance:	$	4948,~~085~~618,~~530~~808		$	~~181~~137,~~822~~562,~~323~~743		$	2050,~~649~~113,~~944~~695		$	3834,~~721~~583,~~182~~824		$	~~195~~182,~~128~~430,~~796~~665		$	~~485~~453,~~407~~309,~~775~~735

Changes in the collectively evaluated for impairment loan categories for the March 31, ~~2011~~2012 and ~~December~~June 3130, ~~2011~~2012 periods are related primarily to the Bank’s charge-off experience for the respective prior twelve month periods. There has not been a change in the Bank’s methodology in determining the allowance for loan losses.

In accordance with ASC 310, Receivables, a loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment unless the Company believes an individual impairment analysis is warranted.

The Company uses real estate appraisals to value impaired loans and future cash flows or other appropriate methods to determine fair value. With the use of these methods, we provide valuation allowances for anticipated losses when management determines that a decline in the value of the collateral or expected cash flows has occurred.

16Regarding the fair value disclosures specifically included in the June 30, 2012 and March 31, 2012 disclosures, all impaired loans were included in Levels 2 or 3 of the fair value hierarchy based on our methodology described above and in the relevant filings. The loans were disclosed in the fair value measurements disclosure net of the related specific impairments.

Regarding the fair value disclosures specifically included in the December 31, 2011 and March 31, 2011 disclosures, all impaired loans were included in Levels 2 or 3 of the fair value hierarchy based on our methodology described above and in the relevant filings. The loans were disclosed in the fair value measurements disclosure net of the related specific impairments.13

Impaired loans by class are as follows:

Nine Months Ended December 31, 2011
Three Months Ended June 30, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial – Non Real Estate
Commercial & Industrial	$	~~547~~397,~~280~~674	$	~~547~~397,~~280~~674	$	---	$	1522,~~437,457~~208	$	185,~~127~~856
Commercial Real Estate
Commercial Real Estate		107,~~214~~529,~~192~~232		107,~~214~~529,~~192~~232		---		109,~~701~~697,~~868~~878		~~441~~59,~~885~~026
Land		988,205		988,205		---		1,233,434		7,635
Multifamily		---		---		---		707,843		---
Multifamily		943,791		943,791		---		967,517		42,471
Construction and Land Development
Construction
Residential		489,489		489,489		---		696,660		6,119
Residential		966,195		966,195		---		482,384		16,719
Other Construction and Land Development		1,021,249		1,021,249		---		1,198,733		6,467
Commercial		---		---		---		---		---
Consumer – Non Real Estate
Automobile		671,~~627~~187		671,~~627~~187		---		~~166~~68,~~445~~228		---
Other		189,~~726~~819		189,~~726~~819		---		~~147~~73,~~465~~401		---
Residential
Single Family		68,~~915~~465,~~739~~530		68,~~915~~465,~~739~~530		---		7,~~949~~245,~~333~~477		~~245~~68,~~578~~432
Equity Lines and Loans		~~859~~588,~~642~~883		~~859~~588,~~642~~883		---		~~870~~963,~~906~~550		31,~~956~~311
With allowance recorded:
Commercial – Non Real Estate
Commercial & Industrial	$	1,~~166~~060,~~073~~512	$	1,~~166~~060,~~073~~512	$	~~578~~563,~~191~~185	$	~~458~~851,~~073~~381	$	---
Commercial Real Estate
Commercial Real Estate		~~532~~1,~~500~~839,478		~~532~~1,~~500~~839,478		87598,~~500~~478		1,~~167~~548,~~901~~464		---
Land		244,966		244,966		112,966		148,307		---
Multifamily		1,017,832		1,017,832		65,813		315,632		---
Multifamily		82,218		82,218		37,905		86,241		---
Construction and Land Development
Construction
Residential		---		---		---		---		---
Commercial		---		---		---		---		---
Other Construction and Land Development		1,089,444		1,089,444		67,744		713,043		---
Consumer – Non Real Estate
Automobile		---		---		---		~~3,390~~---		---
Other		~~257~~172,~~401~~131		~~257~~172,~~401~~131		9471,~~170~~515		71170,~~494~~402		---
Residential
Single Family		32,~~544~~336,~~186~~148		32,~~544~~336,~~186~~148		~~909~~266,~~987~~760		42,~~245~~976,~~853~~273		---
Equity Lines and Loans		~~563~~539,~~954~~801		~~563~~539,~~954~~801		~~283~~187,~~003~~677		~~494~~458,~~441~~640		---
Total:
Commercial – Non Real Estate
Commercial & Industrial	$	1,~~713~~458,~~353~~186	$	1,~~713~~458,~~353~~186	$	~~578~~563,~~191~~185	$	1,~~895~~373,~~530~~589	$	185,~~127~~856
Commercial Real Estate
Commercial Real Estate		109,~~746~~368,~~692~~710		109,~~746~~368,~~692~~710		87598,~~500~~478		11,~~869~~246,~~769~~342		~~441~~59,~~885~~026
Land		1,233,171		1,233,171		112,966		1,381,741		7,635
Multifamily		1,017,832		1,017,832		65,813		1,023,475		---
Multifamily		1,026,009		1,026,009		37,905		1,053,758		42,471
Construction and Land Development
Construction
Residential		489,489		489,489		---		696,660		6,119
Residential		966,195		966,195		---		482,384		16,719
Other Construction and Land Development		2,110,693		2,110,693		67,744		1,911,776		6,467
Commercial		---		---		---		---		---
Consumer – Non Real Estate
Automobile		671,~~627~~187		671,~~627~~187		---		~~169~~68,~~835~~228		---
Other		~~276~~181,~~127~~950		~~276~~181,~~127~~950		9471,~~170~~515		~~218~~243,~~959~~803		---
Residential
Single Family		10,~~459~~801,~~925~~678		10,~~459~~801,~~925~~678		~~909~~266,~~987~~760		1210,~~195~~221,~~186~~750		~~245~~68,~~578~~432
Equity Lines and Loans		1,~~423~~128,~~596~~684		1,~~423~~128,~~596~~684		~~283~~187,~~003~~677		1,~~365~~422,~~347~~190		31,~~956~~311

1714

Impaired loans by class are as follows:

Year Ended March 31, 2012
			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance:
Commercial – Non Real Estate
Commercial & Industrial	$	496,164	$	496,164	$	---	$	584,174	$	23,993
Commercial Real Estate
Commercial Real Estate		10,147,439		10,147,439		---		10,156,005		366,944
Multifamily		943,791		943,791		---		943,791		56,627
Construction and Land Development
Residential		1,009,843		1,009,843		---		654,567		24,474
Other Construction and Land Development		1,139,660		1,139,660		---		1,370,621		25,868
Consumer – Non Real Estate
Automobile		52,983		52,983		---		126,817		---
Other		3,688		3,688		---		141,484		---
Residential
Single Family		6,606,343		6,606,343		---		6,990,053		294,261
Equity Lines and Loans		600,059		600,059		---		981,298		7,810

With allowance recorded:
Commercial – Non Real Estate
Commercial & Industrial	$	1,075,269	$	1,075,269	$	566,942	$	700,246	$	---
Commercial Real Estate
Commercial Real Estate		526,807		526,807		81,807		1,176,136		---
Multifamily		79,089		79,089		34,776		82,288		---
Construction and Land Development
Residential		---		---		---		---		---
Other Construction and Land Development		1,169,501		1,169,501		140,900		440,682		---
Consumer – Non Real Estate
Automobile		---		---		---		---		---
Other		226,482		226,482		77,666		127,369		---
Residential
Single Family		2,624,532		2,624,532		377,145		3,553,900		---
Equity Lines and Loans		484,949		484,949		231,824		579,503		---

Total:
Commercial – Non Real Estate
Commercial & Industrial	$	1,571,433	$	1,571,433	$	566,942	$	1,284,420	$	23,993
Commercial Real Estate
Commercial Real Estate		10,674,246		10,674,246		81,807		11,332,141		366,944
Multifamily		1,022,880		1,022,880		34,776		1,026,079		56,627
Construction and Land Development
Residential		1,009,843		1,009,843		---		654,567		24,474
Other Construction and Land Development		2,309,161		2,309,161		140,900		1,811,303		25,868
Consumer – Non Real Estate
Automobile		52,983		52,983		---		126,817		---
Other		402,428		402,428		77,666		268,853		---
Residential
Single Family		9,058,617		9,058,617		377,145		10,543,953		294,261
Equity Lines and Loans		1,085,008		1,085,008		231,824		1,560,801		7,810

Year Ended March 31, 2011
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Average Recorded Investment		Interest Income Recognized
With no related allowance:
Commercial – Non Real Estate
Commercial & Industrial	$	3,909,295	$	3,909,295	$	---	$	1,814,361	$	185,434
Commercial Real Estate
Commercial Real Estate		12,330,888		12,330,888		---		7,014,822		733,552
Land		590,914		590,914		---		695,445		10,198
Multifamily		943,791		943,791		---		306,226		60,898
Construction
Residential		321,114		321,114		---		323,182		16,056
Commercial		---		---		---		---		---
Consumer – Non Real Estate
Automobile		211,494		211,494		---		190,448		14,623
Other		27,615		27,615		---		39,692		1,573
Residential
Single Family		10,443,463		10,443,463		---		6,085,676		526,808
Equity Lines and Loans		158,493		158,493		---		247,320		5,769
With allowance recorded:
Commercial – Non Real Estate
Commercial & Industrial	$	106,576	$	106,576	$	68,695	$	1,855,492	$	7,128
Commercial Real Estate
Commercial Real Estate		493,867		493,867		207,867		1,271,307		---
Land		---		---		---		1,713,795		---
Multifamily		94,903		94,903		49,903		47,452		4,271
Construction
Residential		---		---		---		658,538		---
Commercial		---		---		---		---		---
Consumer – Non Real Estate
Automobile		13,561		13,561		13,561		3,390		---
Other		2,980		2,980		2,980		1,490		---
Residential
Single Family		5,392,344		5,392,344		1,563,034		3,504,700		168,012
Equity Lines and Loans		144,700		144,700		144,700		219,714		2,080
Total:
Commercial – Non Real Estate
Commercial & Industrial	$	4,015,871	$	4,015,871	$	68,695	$	3,669,853	$	192,562
Commercial Real Estate
Commercial Real Estate		12,824,755		12,824,755		207,867		8,286,129		733,552
Land		590,914		590,914		---		2,409,240		10,198
Multifamily		1,038,694		1,038,694		49,903		353,678		65,169
Construction
Residential		321,114		321,114		---		981,720		16,056
Commercial		---		---		---		---		---
Consumer – Non Real Estate
Automobile		225,055		225,055		13,561		193,838		14,623
Other		30,595		30,595		2,980		41,182		1,573
Residential
Single Family		15,835,807		15,835,807		1,563,034		9,590,376		694,820
Equity Lines and Loans		303,193		303,193		144,700		467,034		7,849

No additional funds are committed to be advanced in connection with impaired loans. As of June 30, 2012, the Company had $1,775,967 of loans 90 days past due and still accruing interest.

18If interest on nonaccrual loans had been accrued, such income would have approximated $242,503 for the three months ended June 30, 2012 and $198,211 for the year ended March 31, 2012.

~~No additional funds are committed to be advanced in connection with impaired loans. As of December 31, 2011, the Company had $557,500 of loans 90 days past due and still accruing interest.~~15

IfFor ~~interest~~the onthree ~~nonaccrual~~months ~~loans~~ended ~~had~~June ~~been~~30, ~~accrued~~2012, ~~such~~loans ~~income~~modified ~~would~~as ~~have~~troubled ~~approximated~~debt restructurings and included in impaired loans in the disclosure above totaled $~~177~~20,~~974~~069,000. At ~~for~~June 30, 2012, $18,220,000 of the ~~nine~~loans ~~months~~classified ~~ended~~as ~~December~~troubled ~~31,~~debt ~~2011~~restructurings ~~and~~are in compliance with the modified terms. There was $~~324~~21,~~689~~115,000 ~~for~~in ~~the~~troubled ~~year~~debt ~~ended~~restructurings at March 31, ~~2011~~2012. The following table provides further information regarding our troubled debt restructurings during the periods ended June 30, 2012:

For the nine months ended December 31, 2011, loans modified as troubled debt restructurings and included in impaired loans in the disclosure above totaled $21,214,000. At December 31, 2011, $20,600,000 of the loans classified as troubled debt restructurings are in compliance with the modified terms. There was $21,044,000 in troubled debt restructurings at March 31, 2011. The following table provides further information regarding our troubled debt restructurings during the periods ended December 31, 2011:

	Three Months Ended June 30, 2012
	Number of		Pre-modification outstanding		Post-modification outstanding
	Contracts		recorded investment		recorded investment
Residential		-	$	---	$	---
Commercial - real estate		-		---		---
Construction		-		---		---
Commercial – non real estate		1		125,000		125,000
Consumer – non real estate		-		---		---
Total		-	$	125,000	$	125,000

	Three Months Ended December 31, 2011
	Number of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Residential		-	$	---	$	---
Commercial - real estate		1		70,221		70,221
Construction		1		124,727		124,727
Commercial – non real estate		1		128,772		128,772
Consumer – non real estate		-		---		---
Total		3	$	323,720	$	323,720
	Nine Months Ended December 31, 2011
	Number of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Residential		4	$	972,015	$	983,527
Commercial - real estate		4		1,420,328		1,431,152
Construction		1		124,727		124,727
Commercial – non real estate		2		144,137		144,137
Consumer – non real estate		-		---		---
Total		11	$	2,661,207	$	2,683,543

The table below shows troubled debt restructurings that subsequently defaulted within twelve months of modification as of June 30, 2012:

The table below shows troubled debt restructurings that subsequently defaulted within twelve months of modification as of December 31, 2011:

	Three Months Ended June 30, 2012
	Number of Contracts		Recorded Investment
Residential		1	$	307,232
Commercial - real estate		-		---
Construction		-		---
Commercial – non real estate		-		---
Consumer – non real estate		-		---
Total		1	$	307,232

	Three Months Ended December 31, 2011				Nine Months Ended December 31, 2011
	Number of Contracts		Recorded Investment		Number of Contracts		Recorded Investment
Residential		-	$	---		-	$	---
Commercial - real estate		-		---		-		---
Construction		-		---		-		---
Commercial – non real estate		-		---		-		---
Consumer – non real estate		2		7,990		4		26,320
Total		2	$	7,990		4	$	26,320

Nonaccrual and past due loans by class are as follows:

As of December 31, 2011

As of June 30, 2012

30-59 Days Past Due

60-89 Days Past Due

90 Days or More Past Due

Total Past Due

Accruing Loans 90 Days or More Past Due

Nonaccrual Loans

Accruing

Loans 90

90 Days

Days or

30-59 Days

60-89 Days

or More

Total Past

Nonaccrual

Past Due

Due

Past Due

Loans

Commercial – Non Real Estate

Commercial & Industrial

1537,~~081,859~~668

~~332~~111,~~752~~964

37344,~~340~~459

1994,~~451,951~~091

25344,~~000~~459

~~370~~1,~~658~~127,205

Commercial Real Estate

Commercial Real estate

~~931~~3,~~009~~342,863

~~2,248,623~~---

~~619~~1,~~134~~605,740

34,~~798~~948,~~766~~603

~~532~~999,~~500~~762

~~408~~4,~~713~~994,089

Land

372,290

22,312

217,233

611,835

---

724,172

Multifamily

---

1,017,831

---

1,017,831

Multifamily

943,791

---

82,218

1,026,009

---

82,218

Construction and Land Development

Construction

Residential

---

Residential

632,116

---

520,354

1,152,470

---

520,354

Other Construction and Land Development

197,179

457,816

---

654,995

---

1,281,031

Commercial

---

Consumer – Non Real Estate

Automobile

~~742~~605,~~099~~994

~~103~~54,~~279~~647

506,~~305~~667

~~895~~667,~~683~~308

~~---~~6,667

671,~~627~~187

Other

~~122~~55,~~150~~587

1615,~~854~~209

~~251~~172,~~358~~258

~~390~~243,~~362~~054

---

~~251~~181,~~358~~950

Residential

Single Family

1826,~~816,080~~153

4355,~~022,911~~499

~~889~~2,~~506~~732,565

63,~~728~~914,~~497~~217

~~---~~269,993

45,~~491~~459,~~448~~814

Equity Lines and Loans

~~137~~412,~~574~~383

~~19,990~~---

~~865~~768,~~490~~487

1,~~023~~180,~~054~~870

~~---~~155,086

~~891~~990,~~490~~721

Totals

65,~~778~~977,~~968~~827

6995,~~766,721~~135

36,~~532~~648,~~938~~007

1713,~~078~~620,~~627~~969

~~557~~1,~~500~~775,967

715,~~808~~053,~~038~~828

As of ~~December~~June 3130, ~~2011~~2012, the Company had $~~557~~1,~~500~~775,967 of loans greater than 90 days past due and still accruing interest. These loans are well secured and in the process of collection.

As of March 31, 2011
	30-59 Days Past Due		60-89 Days Past Due		90 Days or More Past Due		Total Past Due		Accruing Loans 90 Days or More Past Due		Nonaccrual Loans
Commercial – Non Real Estate
Commercial & Industrial	$	743,540	$	609,235	$	606,202	$	1,958,977	$	---	$	606,202
Commercial Real Estate
Commercial Real estate		239,678		1,754,785		1,236,047		3,230,510		---		1,236,047
Land		335,602		---		337,747		673,349		---		337,747
Multifamily		---		---		---		---		---		---
Construction
Residential		---		---		---		---		---		---
Commercial		---		---		---		---		---		---
Consumer – Non Real Estate
Automobile		441,153		122,476		74,699		638,328		---		74,699
Other		16,167		285,055		3,821		305,043		---		3,821
Residential
Single Family		755,029		717,528		3,660,755		5,133,312		---		3,660,755
Equity Lines and Loans		404,394		150,033		256,328		810,755		---		256,328
Totals	$	2,935,563	$	3,639,112	$	6,175,599	$	12,750,274	$	---	$	6,175,599

Nonaccrual loans are included in Total Past Due.

As of March 31, 2012
									Accruing
									Loans
					90 Days				90 Days
	30-59 Days		60-89 Days		or More		Total		or More		Nonaccrual
	Past Due		Past Due		Past Due		Past Due		Past Due		Loans
Commercial – Non Real Estate
Commercial & Industrial	$	633,659	$	502,674	$	365,985	$	1,502,318	$	305,581	$	1,232,156
Commercial Real Estate
Commercial Real estate		1,710,467		---		3,384,970		5,095,437		2,453,359		4,046,735
Multifamily		---		943,792		79,089		1,022,881		---		79,089
Construction and Land Development
Residential		283,125		---		520,354		803,479		---		520,354
Other Construction and Land Development		121,083		20,622		132,147		273,852		---		1,558,814
Consumer – Non Real Estate
Automobile		417,745		46,932		72,627		537,304		28,904		52,983
Other		86,465		35,305		232,997		354,767		2,827		230,170
Residential
Single Family		1,622,088		3,059,536		1,271,891		5,953,515		137,085		3,569,655
Equity Lines and Loans		318,148		208,785		431,800		958,733		---		916,749
Totals	$	5,192,780	$	4,817,646	$	6,491,860	$	16,502,286	$	2,927,756	$	12,206,705

20Past due nonaccrual loans are included in Total Past Due.

The Company uses the following rating system for evaluating the risks associated with loans:

Pass A Pass loan’s primary source of repayment is satisfactory, with secondary sources very likely to be realized if necessary. Special Mention A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification. Substandard A Substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loss A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Special Mention A Special Mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in the deterioration of the repayment prospects for the asset or the Company’s credit position at some future date. Special Mention loans are not adversely classified and do not expose an institution to sufficient risk to warrant adverse classification.

Substandard A Substandard loan is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified must have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful A loan classified Doubtful has all the weaknesses inherent in one classified Substandard with the added characteristics that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

Loss A loan classified Loss is considered uncollectible and of such little value that continuance as a bankable asset is not warranted. This classification does not mean that the asset has absolutely no recovery or salvage value, but rather it is not practical or desirable to defer writing off this basically worthless asset even though partial recovery may be affected in the future.

Credit Quality by class is as follows:

As of December 31, 2011
As of June 30, 2012
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
			Special
Internal Risk Rating Grades	Pass		Mention		Substandard		Doubtful		Loss
Commercial – Non Real Estate
Commercial & Industrial	$	3843,~~869~~959,~~069~~143	$	24,~~923~~369,~~492~~412	$	65,~~073~~063,~~839~~859	$	68943,~~766~~420	$	---
Commercial Real Estate
Commercial Real estate		9799,~~643~~435,~~424~~745		138,~~691~~437,~~447~~911		910,~~236~~489,~~359~~397		---		---
Land		32,512,666		4,355,873		2,229,658		---		---
Multifamily		12,173,892		---		1,017,831		---		---
Multifamily		14,959,984		---		1,026,009		---		---
Construction and Land Development
Construction
Residential		3,676,759		1,314,327		256,000		---		---
Residential		7,491,815		3,408,797		803,479		---		---
Other Construction and Land Development		32,573,840		3,595,873		1,975,143		---		---
Commercial		5,661,861		---		---		---		---
Consumer – Non Real Estate
Automobile		2726,~~279~~252,~~954~~439		~~169,596~~---		~~109~~19,~~728~~258		---		---
Other		6,~~518~~983,~~625~~631		~~293,141~~---		~~280~~12,~~100~~488		~~---~~172,132		---
Residential
Single Family		~~111~~121,~~856~~397,~~162~~586		115,~~636~~194,~~606~~565		139,~~122~~327,~~484~~769		---		---
Equity Lines and Loans		4345,~~451~~426,~~071~~017		1444,~~726,519~~652		1,~~503~~272,~~261~~007		---		---
Totals	$	~~386~~391,~~244~~879,~~631~~052	$	3823,~~205~~356,~~471~~740	$	3429,~~384~~433,~~917~~752	$	681,~~766~~115,552	$	---

2117

As of March 31, 2011
As of March 31, 2012
Internal Risk Rating Grades	Pass		Special Mention		Substandard		Doubtful		Loss
			Special
Internal Risk Rating Grades	Pass		Mention		Substandard		Doubtful		Loss
Commercial – Non Real Estate
Commercial & Industrial	$	38,~~043~~349,~~245~~018	$	4,~~858~~202,~~861~~456	$	65,~~112~~086,~~424~~240	$	71981,~~000~~094	$	---
Commercial Real Estate
Commercial Real estate		~~101~~99,~~373~~482,~~538~~793		1710,~~705~~758,~~767~~946		711,~~806~~824,~~399~~719		---		---
Land		31,858,946		4,424,158		1,946,165		---		---
Multifamily		14,473,405		---		1,022,880		---		---
Multifamily		15,676,683		---		1,030,667		---		---
Construction and Land Development
Construction
Residential		5,374,826		2,560,717		803,479		---		---
Residential		13,329,026		855,077		332,000		---		---
Other Construction and Land Development		32,578,704		5,751,445		3,044,524		---		---
Commercial		6,133,841		---		---		---		---
Consumer – Non Real Estate
Automobile		3027,~~824~~268,~~809~~619		~~226~~59,~~026~~157		~~235~~63,~~550~~098		---		---
Other		76,~~012~~767,~~773~~017		29190,~~057~~903		~~392~~8,~~967~~548		~~---~~226,482		---
Residential
Single Family		~~121~~116,~~410~~061,~~759~~654		128,~~964~~138,~~909~~858		1311,~~822~~548,~~691~~057		---		---
Equity Lines and Loans		4344,~~823~~311,~~032~~595		2973,~~382,852~~496		~~724~~1,~~553~~397,005		---		---
Totals	$	~~409~~384,~~486~~667,~~652~~631	$	4332,~~446~~635,~~707~~978	$	3234,~~403~~798,~~416~~550	$	711,~~000~~207,576	$	---

Note 11. Real Estate Owned

At ~~December~~June 3130, ~~2011~~2012 and March 31, ~~2011~~2012, OREO was $127,~~664~~543,~~814~~843 and $109,~~263~~259,~~488~~432, respectively. OREO is primarily comprised of residential single family properties, residential construction, residential lots and commercial real estate. ~~Changes in the balance for OREO are as follows:~~

	December 31, 2011			March 31, 2011
Balance at the beginning of period, gross	$	11,609,766		$	4,022,853
Transfers from loans		8,769,084			14,457,276
Capitalized costs		181,866			304,179
Sales proceeds		(5,648,063	)		(5,677,509	)
(Loss) on disposition		(297,895	)		(1,497,033	)
Balance at the end of period, gross		14,614,758			11,609,766
Less valuation allowance		(1,949,944	)		(1,346,278	)
Balance at the end of period, net	$	12,664,814		$	10,263,488

Changes in the balance for OREO are as follows:

	June 30, 2012			March 31, 2012

Balance at the beginning of period, gross	$	11,762,376		$	11,609,766
Transfers from loans		969,780			11,128,085
Capitalized costs		24,370			185,516
Sales proceeds		(2,433,729	)		(8,998,552	)
(Loss) on disposition		(884,576	)		(2,162,439	)
Balance at the end of period, gross		9,438,221			11,762,376
Less valuation allowance		(1,894,378	)		(2,502,944	)
Balance at the end of period, net	$	7,543,843		$	9,259,432

Changes in the allowance for OREO are as follows:

Balance at the beginning of the period	$	1,346,278		$	992,284
	June 30, 2012			March 31, 2012
Provision for losses		1,701,232			1,402,359
Balance at the beginning of the period	$	2,502,944		$	1,346,278
Charge-offs, net		(1,097,566	)		(1,048,365	)
Provision for losses		265,873			3,047,889
Balance at the end of period	$	1,949,944		$	1,346,278
Charge-offs, net		(874,439	)		(1,891,223	)
Balance at the end of period	$	1,894,378		$	2,502,944

Expenses applicable to REO, other than the valuation allowance, were $~~620~~87,~~798~~473 and $~~589~~440,~~415~~033 for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011, respectively.

22Note 12. Subsequent Events

~~Item~~On 2July 17, 2012, the OCC imposed higher minimum capital ratios on the Bank, and the Bank’s capital ratios at June 30, 2012, exceeded those higher requirements. ~~MANAGEMENT'S~~ See ~~DISCUSSION~~Note ~~AND~~4 ~~ANALYSIS~~to OFthe ~~FINANCIAL~~Notes ~~CONDITION~~to ~~AND~~Unaudited Interim Consolidated Financial Statements in this Form 10-Q.

~~RESULTS OF OPERATIONS.~~18

On August 2, 2012, the Company and the Bank entered into an Agreement and Plan of Merger with City Holding Company and City National Bank of West Virginia pursuant to which the Company will be merged with and into City Holding Company, and, immediately thereafter, Community Bank will be merged with and into City National Bank of West Virginia. At the effective time of the merger of the Company into City Holding Company, each common stockholder of the Company will receive 0.1753 shares of the common stock, par value $2.50 per share, of City Holding Company, with cash paid in lieu of fractional shares. The transaction is subject to customary closing conditions, including the receipt of regulatory approvals and approval of the Agreement by the stockholders of the Registrant, and is expected to be completed in early 2013. The Agreement and Plan of Merger is summarized in and included as an exhibit to the Company’s Form 8-K Current Report filed on August 3, 2012.

On August 9, 2012, the Bank entered into a written agreement with the OCC, which is summarized in Item 5 of and included as Exhibit 10.15 to this Form 10-Q.

Item 2.	MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
	ANDRESULTS 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. The following is primarily from management’s perspective and may not contain all information that is of importance to the reader. Accordingly, the information should be considered in the context of the consolidated financial statements and other related information contained herein.

Net income ~~(loss)~~ for the quarter ended ~~December~~June 3130, ~~2011 decreased~~2012 increased $~~548~~670,000 to $~~(521,000)~~1.2 million compared to $27548,000 for the quarter ended ~~December~~June 3130, ~~2010~~2011. Net income ~~(loss)~~ for the quarter ~~decreased~~increased primarily due to a $522,000, or 73.9%, decrease in the provision for loan loss ~~increase~~and ofa $1.32 million, or 7176.67%, ~~partially~~decrease ~~offset~~in byreal anestate ~~increase~~owned and collection expenses. The decreased provision for the period was primarily related to lower charge-offs and management’s analysis of the Bank’s loan portfolio. This was partially offset by a $~~356~~488,000, or 68.73%, decrease in net interest income resulting primarily from a decrease in interest ~~expense.~~income ~~The~~reflecting ~~increased provision for~~ the ~~period~~decrease ~~was~~in ~~primarily~~total ~~related~~loans, toespecially ~~higher~~commercial, ~~charge-offs~~construction and ~~management’s~~development ~~analysis~~loans ofthat ~~the~~carry ~~Bank’s~~a ~~loan~~higher ~~portfolio~~interest ~~and the enhanced methodology~~rate.

Net interest income for the quarter ended ~~December~~June 3130, ~~2011~~2012 ~~increased~~decreased $~~356~~488,000, or 68.73%, to $5.74 million compared to the quarter ended ~~December~~June 3130, ~~2010~~2011. 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. The primary factor contributing to the ~~increase~~decrease in net interest income for the quarter ended ~~December~~June 3130, ~~2011~~2012 was lower ~~rates~~average ~~paid~~balances on interest-bearing ~~liabilities~~assets.

Management will continue to monitor the balance sheet to manage the level of regulatory capital and liquidity requirements. We continue to monitor the impact changing interest rates may have on both our interest-earning assets and our interest rate spread. The Bank has approximately $347.12 million in adjustable rate loans, or 7677.89% 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 will limitations on interest rate adjustments on certain adjustable rate loans.

~~Our~~On ~~continued~~July ~~emphasis on acquiring interest and non-interest bearing transaction accounts~~17, ~~combined with a falling interest rate environment~~2012, ~~has impacted~~ the ~~composition~~OCC ofimposed ~~our~~higher ~~interest-bearing~~minimum ~~liabilities.~~capital ~~Deposits~~ratios ~~were~~on down approximately $16.0 million, or 4.2%, at December 31, 2011 from March 31, 2011, due to decreases in time deposits, partially offset by increases in interest bearing transaction accounts. Management plans to remain competitive in our ~~deposit~~wholly ~~pricing.~~owned ~~Due~~subsidiary toCommunity ~~relative pricing advantages~~Bank, ~~we have utilized brokered deposits~~ and ~~borrowings during~~ the ~~December~~Bank’s ~~31,~~capital ~~2011~~ratios ~~quarter.~~at ~~During~~June ~~the December 31~~30, ~~2011 quarter~~2012, weexceeded ~~experienced~~those ~~continuing~~higher ~~competition for time deposits~~requirements. See ~~Management~~Note is4 ~~cognizant of the potential for compression in the Bank’s margin related~~ to the ~~need~~Notes to ~~acquire~~Unaudited ~~funds~~Interim ~~and~~Consolidated ~~the~~Financial ~~pace~~Statements ~~of interest rate changes. Management will continue to monitor the level of deposits and borrowings~~ in ~~relation~~this toForm ~~the current interest rate environment~~10-Q.

~~The~~On ~~Bank’s~~August ~~loan~~2, ~~portfolio~~2012, ~~decreased~~the ~~$28.4~~Company ~~million~~and ~~from~~the ~~March~~its ~~31,~~wholly ~~2011~~owned tosubsidiary ~~December~~Community 31Bank, ~~2011. This~~entered ~~decrease~~into ~~was~~an ~~primarily~~Agreement inand ~~residential~~Plan ~~real~~of ~~estate~~Merger ~~loans,~~with ~~commercial~~City ~~real~~Holding ~~estate~~Company ~~loans,~~and ~~construction~~City ~~loans~~National ~~and~~Bank ~~consumer~~of ~~loans. We~~West ~~expect~~Virginia ~~any~~pursuant ~~future~~to ~~loan~~which ~~growth~~the toCompany will be ~~slow~~merged orwith ~~moderate~~and ~~due~~into toCity aHolding ~~slower~~Company, ~~economy~~ and, ~~underwriting~~immediately ~~changes~~thereafter, toCommunity ~~limit~~Bank ~~funding~~will ofbe ~~speculative~~merged ~~construction~~with ~~loans~~and into City National Bank of West Virginia. WeAt ~~have~~the ~~experienced~~effective ~~reduced~~time ~~construction~~of ~~activity~~the inmerger ~~our~~of ~~market~~the ~~areas~~Company ~~and~~into ~~existing~~City ~~commercial~~Holding ~~real~~Company, ~~estate~~each ~~activity~~common ~~continues~~stockholder toof bethe ~~weak~~Company will receive 0. At1753 ~~December~~shares ~~31,~~of ~~2011,~~the ~~our~~common ~~assets~~stock, ~~totaled~~par value $~~509~~2.550 ~~million~~per share, ~~including~~of ~~net~~City ~~loans~~Holding ~~receivable~~Company, with cash paid in lieu of ~~$449~~fractional shares.9 The ~~million,~~transaction ~~compared~~is subject to ~~total~~customary ~~assets of~~closing ~~$530.1 million~~conditions, including ~~net~~the ~~loans~~receipt ~~receivable~~of regulatory approvals and approval of ~~$478.3~~the ~~million,~~Agreement atby ~~March~~the 31stockholders of the Registrant, ~~2011~~and is expected to be completed in early 2013. ~~Commercial~~The ~~real~~Agreement ~~estate~~and ~~loans~~Plan ~~were~~of ~~$175.7~~Merger ~~million~~is orsummarized ~~38.3%,~~in ~~residential~~and ~~real~~included ~~estate~~as ~~loans~~an ~~were~~exhibit ~~$183.3~~to ~~million~~the orCompany’s ~~40.0%,~~Form ~~construction~~8-K ~~loans~~Current ~~totaled~~Report ~~$17.4~~filed ~~million~~on orAugust 3~~.8%~~, ~~and~~ 2012.

23On August 9, 2012, the Community entered into a written agreement with the OCC, which is summarized in Item 5 of and included as Exhibit 10.15 to this Form 10-Q.

~~commercial~~Our ~~business~~continued ~~loans~~emphasis on acquiring interest and non-interest bearing transaction accounts, combined with a falling interest rate environment, has impacted the composition of our interest-bearing liabilities. Deposits were down approximately $474.93 million, or 101.42%, ofat ~~our~~June ~~total~~30, ~~loan~~2012 ~~portfolio~~from atMarch ~~December~~ 31, 2011, ~~compared~~due to ~~commercial~~decreases ~~real~~in ~~estate~~time ~~loans~~deposits, ofinterest ~~$181.8~~bearing ~~million~~transaction oraccounts, ~~37.5%~~and savings accounts, ~~residential~~partially ~~real~~offset ~~estate~~by ~~loans~~increases ofin ~~$195.1~~noninterest ~~million~~bearing ortransaction 40accounts.~~1%,~~ Management ~~construction~~plans ~~loans~~to remain competitive in our deposit pricing; though rates on new time deposits with terms in excess on one year must be approved by our potential acquiror under the Agreement and Plan of ~~$20~~Merger.7 Due ~~million~~to orrelative ~~4.3%~~pricing advantages, we have utilized brokered deposits and ~~commercial~~borrowings ~~business~~during ~~loans~~the ofJune ~~$49~~30, 2012 quarter.1 ~~million~~During orthe ~~10.1%~~June at30, ~~March~~2012 31quarter, ~~2011~~we experienced increased competition for time deposits.

~~At December 31, 2011, non-performing assets totaled $~~20.8 million or 4.09% of assets compared to $16.6 million or 3.12% of assets at March 31, 2011. Our allowance for loan losses to non-performing loans was 124.04% and to total loans was 2.2% at December 31, 2011 compared to 127.04% and 1.6%, respectively, at March 31, 2011 due primarily to increased general allowances. The increase in nonperforming assets consisted of a $1.6 million increase in nonaccrual loans and $2.6 million in real estate owned and repossessed assets. Due primarily to the slow economy, we recognize the possibility of an increase in non-performing assets in the future. Charge-offs of $3.2 million during the nine month period consisted primarily of $2.4 million of residential real estate loans, $565,000 of commercial real estate loans, $126,000 of commercial business loans and $138,000 of automobile loans.

Management is cognizant of the potential for 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.

The Bank’s loan portfolio decreased $7.1 million from March 31, 2012 to June 30, 2012. This decrease was primarily in commercial real estate loans, construction and land development loans, and consumer loans, partially offset by increases to commercial business loans. We expect any future loan growth to be slow or moderate due to a slower economy and underwriting changes to limit funding of speculative construction loans. We have experienced reduced construction activity in our market areas and existing commercial real estate activity continues to be weak. At June 30, 2012, our assets totaled $498.5 million, including net loans receivable of $438.0 million, compared to total assets of $503.9 million, including net loans receivable of $445.1 million, at March 31, 2012. Commercial real estate loans were $131.6 million or 29.5%, residential real estate loans were $183.1 million or 41.1%, construction and land development loans totaled $43.4 million or 9.7%, and commercial business loans were $54.3 million or 12.2% of our total loan portfolio at June 30, 2012 compared to commercial real estate loans of $137.6 million or 30.3%, residential real estate loans of $182.4 million or 40.2%, construction and land development loans of $50.1 million or 11.1%, and commercial business loans of $48.6 million or 10.7% at March 31, 2012.

At June 30, 2012, non-performing assets totaled $22.7 million or 4.56% of assets compared to $21.6 million or 4.29% of assets at March 31, 2012. Our allowance for loan losses to non-performing loans was 56.54% and to total loans was 1.91% at June 30, 2012 compared to 73.00% and 2.0%, respectively, at March 31, 2012 due primarily to decreased general allowances and increased non-performing assets. The increase in nonperforming assets consisted of a $2.8 million increase in nonaccrual loans, partially offset by a decrease of $1.7 million in real estate owned and repossessed assets. Due primarily to the slow economy, we recognize the possibility of an increase in non-performing assets in the future. Charge-offs of $674,000 during the three month period consisted primarily of $399,000 of residential real estate loans, $82,000 of construction and land development, $103,000 of commercial business loans and $90,000 of automobile loans.

Dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. We have experienced declines in real estate values in our market areas. General downward economic trends, reduced availability of commercial credit and continuing high unemployment have negatively impacted the performance of commercial and consumer credit, resulting in additional write-downs. While there have been increases in unemployment and announced layoffs by certain employers in our markets, there has not been a dramatic or widespread increase in unemployment to date. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by other financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased delinquencies relative to the historical norm, lack of customer confidence, increased market volatility and widespread reduction in general business activity.

Our ability to assess the creditworthiness of customers and to estimate the losses inherent in our credit exposure is made more difficult and complex under these difficult market and economic conditions. We may be required to pay higher FDIC premiums if financial institution failures continue to deplete the FDIC insurance fund and reduce the FDIC’s ratio of reserves to insured deposits.

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

~~Additionally,~~The ~~the~~ Dodd-Frank Wall Street Reform and Consumer Protection Act ~~that was~~ enacted on July 21, 2010, provides, among other things, for new restrictions and an expanded framework of regulatory oversight for financial institutions and their holding companies, including the Company and the Bank. Under the new law, the Bank’s primary regulator, the Office of Thrift Supervision, was eliminated and existing federal thrifts are subject to regulation and supervision by the Office of Comptroller of the Currency, which supervises and regulates all national banks. In addition all financial institution holding companies, including the Company, are now regulated by the Board of Governors of the Federal Reserve System, and this regulation will eventually include the application of federal capital requirements similar to those imposed on all commercial banks and may result in additional restrictions on investments and other holding company activities. The law also created a new consumer financial protection bureau that has the authority to promulgate rules intended to protect consumers in the financial products and services market. The creation of this independent bureau could result in new regulatory requirements and raise the cost of regulatory compliance. In ~~addition, new regulations mandated by this Act could require changes in regulatory capital requirements, loan loss provisioning practices, and compensation practices~~

2421

addition, new regulations mandated by this Act could require changes in regulatory capital requirements, loan loss provisioning practices, and compensation practices and will require holding companies to serve as a source of strength for their financial institution subsidiaries. Effective July 21, 2011, financial institutions may pay interest on demand deposits, which could increase our future interest expense. We cannot determine the impact of the new law on our business and operations at this time. Any legislative or regulatory changes in the future could adversely affect our operations and financial condition.

The federal regulators for the Company and the Bank have proposed new capital regulations that, if enacted, would impose capital requirements directly on the Company for the first time and might increase the Bank’s required capital levels.

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

The allowance for loan losses is maintained at a level considered by management to be adequate to absorb future loan losses currently inherent in the loan portfolio. Management's assessment of the adequacy of the allowance is based upon type and volume of the loan portfolio, past loan loss experience, existing and anticipated economic conditions, and other qualitative 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 collectability is not probable. Management's assessment of the adequacy of the allowance is subject to evaluation and adjustment by the Company's regulators.

The allowance consists of specific, general and unallocated components. The specific component relates to loans that are classified as doubtful or substandard. For such loans that are also classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers special mention and non-classified loans and is based on historical loss experience adjusted for qualitative factors. An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. During the ~~December~~June 3130, ~~2011~~2012 quarter the Company evaluated and enhanced the relative value of the qualitative factors used in the determination of the unallocated component of the allowance due to the continuing weak economic conditions and increased level of non-performing assets.

A loan is considered impaired when, based on current information and events, it is probable that the Company 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

2522

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

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

FINANCIAL CONDITION

The Company's total assets decreased $205.64 million to $~~509~~498.5 million at ~~December~~June 3130, ~~2011~~2012 from $~~530~~503.19 million at March 31, ~~2011~~2012 due to decreases in loans receivable of $287.41 million, ~~partially~~real ~~offset~~estate byowned ~~increases~~of in$1.7 ~~real~~million ~~estate~~and ~~owned~~cash of $21.64 million, ~~and~~partially offset by increases in investment securities of $6.20 million. As stated above, the decline in our loan portfolio was primarily in ~~residential~~commercial real estate loans, ~~commercial~~construction ~~real~~and ~~estate~~land ~~loans,~~development ~~construction~~ loans and ~~consumer~~automobile loans. We expect any future loan growth to be slow or moderate due to a slower economy, ~~and~~ underwriting changes to limit funding of speculative construction loans and our higher capital requirements. We have also experienced reduced construction activity in our market areas, while existing commercial real estate activity continues to be weak.

Deposits decreased $164.03 million, or 41.2% to $~~363~~368.1 million at ~~December~~June 3130, ~~2011~~2012, from $~~379~~372.14 million at March 31, ~~2011~~2012. The decrease was primarily due to a decrease in time deposits of $306.47 million and ~~savings~~money market accounts of $~~746~~3.8 million,~~000,~~ partially offset by increases in non-interest bearing checking accounts of $~~108~~5.5 million,~~000~~ ~~and~~savings ~~money~~accounts ~~market~~of $364,000 and interest bearing checking accounts of $15348,000.1 ~~million.~~ The decrease in deposits was related to the decrease in our assets and funding needs. The decrease in deposits was generally achieved by lowering the rates offered on our time deposit products. FHLB advances decreased $42.0 million ~~and other borrowings decreased $1.5 million~~ at ~~December~~June 3130, ~~2011~~2012 from March 31, ~~2011~~ 2012.

Stockholders’ equity increased by $~~262,000~~1.1 million to $5051.05 million at ~~December~~June 3130, ~~2011~~2012, from $4950.84 million at March 31, ~~2011~~2012, due to income for the ~~nine~~three months ended ~~December~~June 3130, ~~2011~~2012 of $~~736~~1.2 million,~~000,~~ partially offset by cash dividend payments on our preferred stock.

At ~~December~~June 3130, ~~2011~~2012, non-performing assets totaled $2022.87 million or 4.0956% of assets compared to $1621.6 million or 34.1229% of assets at March 31, ~~2011~~2012. Non-performing assets at ~~December~~June 3130, ~~2011~~2012 were comprised of repossessed assets of $137.05 million and non accrual loans of $715.80 million. Included in the total non-performing assets at ~~December~~June 3130, ~~2011~~2012, was one single family nonaccrual property totaling $2.21 million, a hotel nonaccrual property totaling $3.1 million and a commercial real estate nonaccrual property totaling $1.3 million. At ~~December~~June 3130, ~~2011~~2012, our allowance for loan losses to non-performing loans was ~~124~~56.0454% and to total loans was 21.295% compared to ~~127~~73.0400% and 12.60%, respectively at March 31, ~~2011~~2012. Our allowance for loan losses ~~increased~~decreased $~~1.8~~400,000 ~~million~~ at ~~December~~June 3130, ~~2011~~2012 compared to March 31, ~~2011~~2012 due to ~~increased unallocated allowances offset by~~ decreased loan balances. Charged off loans during the ~~December~~June 3130, ~~2011~~2012 quarter included loans on which specific reserves had been established at March 31, ~~2011~~2012. Based on current market values of the properties securing our loans, management anticipates no significant losses in excess of the allowance for losses previously recorded. Although management believes that it uses the best information available to make such determinations, future adjustments to allowances may be necessary, and net income could be significantly affected, if circumstances differ substantially from the assumptions used in making the initial determinations. We also had $2120.21 million of loans that were classified as Troubled Debt Restructurings (TDRs) at ~~December~~June 3130, ~~2011~~ 2012, of which $28.56 million were included in nonaccrual loans. These loans have had their original terms modified to facilitate payment by the borrower. The loans have been classified as TDRs primarily due to a change to interest only payments and the maturity of these modified loans is primarily less than one year.

26As of June 30, 2012, there were $23.4 million in loans with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing loan categories. These loans are comprised primarily of non-owner occupied commercial and residential real estate loans with an average balance of approximately $231,000. The largest individual loan or lending relationship in this category has a balance of $2.0 million and is secured by raw land. This loan is of concern due to cash flow issues. There are also six additional loans with balances greater than $1.0 million. A loan 60 days delinquent is generally included in this category and monitored until it has been current

As of December 31, 2011, there were also $38.2 million in loans with respect to which known information about the possible credit problems of the borrowers or the cash flows of the security properties have caused management to have doubts as to the ability of the borrowers to comply with present loan repayment terms and which may result in the future inclusion of such items in the non-performing loan categories. These loans are comprised primarily of non-owner occupied commercial and residential real estate loans with an average balance of approximately $159,000. The largest individual loan or lending relationship in this category has a balance of $3.2 million and is secured by a hotel. This loan is of concern due to cash flow issues. There are also seven additional loans with balances greater than $1.0 million. A loan 60 days delinquent is generally included in this category and monitored until it has been current for six months. Certain loans that are not delinquent may be included due to the nature of the loan’s purpose such as construction or where the loan exhibits other potential weaknesses.23

for six months. Certain loans that are not delinquent may be included due to the nature of the loan’s purpose such as construction or where the loan exhibits other potential weaknesses.

LIQUIDITY AND CAPITAL RESOURCES

Our principal sources of funds are customer deposits, advances from the ~~Federal~~FHLB ~~Home Loan Bank~~ of Atlanta, amortization and prepayment of loans, and funds provided from operations. Management maintains investments in liquid assets based upon its assessment of (i) the need for funds, (ii) expected deposit flows, (iii) the yields available on short-term liquid assets, (iv) the liquidity of our loan portfolio and (v) the objectives of our asset/liability management program. Management believes that the Bank will continue to have adequate liquidity for the foreseeable future. Cash flow projections are regularly reviewed and updated to assure that adequate liquidity is provided. As of ~~December 31~~June 30, ~~2011~~2012, the Bank’s liquidity ratio (liquid assets as a percentage of net withdrawable savings and current borrowings) was 56.16% compared to 2.6% for the same quarter last year.

The Bank has a line of credit with the FHLB equal to 26% of the Bank’s assets, subject to the amount of collateral pledged. Under the terms of its collateral agreement with the FHLB, the Bank provides a blanket lien covering all of its residential first mortgage loans, home equity lines of credit, multi-family loans and commercial loans. In addition, the Bank pledges as collateral its capital stock in and deposits with the FHLB. Based on the collateral pledged as of ~~December~~June 3130, ~~2011~~2012, the total amount of borrowing available under the FHLB line of credit was approximately $~~129~~144.17 million. At ~~December~~ 31June 30, ~~2011~~2012, principal obligations to the FHLB consisted of $9376.0 million in fixed-rate short term borrowings, and we had a $4.0 million letter of credit to the Treasurer of Virginia securing public deposits.

At ~~December~~June 3130, ~~2011~~2012, we had commitments to purchase or originate $58.47 million of loans. Certificates of deposit scheduled to mature in one year or less at ~~December~~June 3130, ~~2011~~2012, totaled $~~146~~139.54 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. Due to the weak economy, the Bank has experienced reduced loan demand and anticipates a reduced liquidity need for loan funding. At ~~December~~June 3130, ~~2011~~2012, we had brokered or internet time deposits of $1115.89 million compared to $1519.31 million at March 31, ~~2011~~2012.

On July 17, 2012, the OCC imposed an individualized minimum capital requirement (“IMCR”) on the Bank, increasing its minimum leverage capital ratio from 4.0% to 8.5% and its total risk-based capital ratio from 8.0% to 12.5%, because of the Bank’s condition and risk profile. As noted below, the Bank’s capital levels at June 30, 2012, exceeded the ratios required by the IMCR. In addition to these minimum capital requirements, the Bank is required to have the capital ratios noted below to be deemed well-capitalized under the OCC prompt corrective action regulations. The Bank was well-capitalized at June 30, 2012. The Bank’s regulatory capital is characterized as “well -capitalized” due to the issuance of preferred stock under the U.S. Treasury Capital Purchase Program. The Company received $12,643,000 from the U.S. Treasury through the sale of 12,643 shares of preferred stock. The Company also issued to the U.S. Treasury a warrant to purchase 351,194 shares of common stock at $5.40 per share. The preferred shares pay a cumulative dividend of 5% per year for the first five years and 9% per year thereafter. The preferred shares are redeemable at any time by the Company at 100% of the issue price, subject to the approval of the Company’s and the Bank’s federal regulators.

27The following table presents the Bank’s regulatory capital ratios at June 30, 2012:

											Minimum Required					Minimum Capital
	Actual					Minimum Required at					Capital Levels Under					Levels to be Deemed
	Capital Levels					Capital Levels					the IMCR4					Well-Capitalized
	Amount		Ratio			Amount		Ratio			Amount		Ratio			Amount		Ratio
						(Dollars in thousands)
Leverage Capital(1)	$	51,703		10.30	%	$	20,079		4.0	%	$	42,668		8.5	%	$	25,099		5.0	%
Tier 1 Risk-Based Capital(2)	$	51,703		12.34	%		N/A		N/A			N/A		N/A		$	25,143		6.0	%
Total Risk-Based Capital(3)	$	56,959		13.59	%	$	33,524		8.0	%	$	52,382		12.5	%	$	41,905		10.0	%

_______________________________________________________

1.	Tier 1 Capital to Total Assets of $502.0 million.
2.	Tier 1 Capital to Risk-Weighted Assets of $419.1 million.
3.	Total Capital to Risk-Weighted Assets of $419.1 million.
4.	The IMCR was not effective until July 17, 2012.

receive OCC approval before paying a dividend to the Company. In addition, under the Agreement and Plan of Merger with City Holding Company, the Company has agreed not to pay dividends to common stockholders pending the consummation of the acquisition.

RESULTS OF OPERATIONS

Three Months Ended ~~December~~June 3130, ~~2011~~2012 and ~~2010~~2011.

General. Net income ~~(loss)~~ for the three months ended ~~December~~June 3130, ~~2011~~2012 ~~decreased~~increased $~~548~~670,000 to $~~(521,000)~~1.2 million from $27548,000 for the three months ended ~~December~~June 3130, ~~2010~~2011. Net interest income ~~increased~~decreased $~~356~~488,000, the provision for loan losses ~~increased~~decreased $~~1.3 million~~522,000, non-interest income decreased $~~163~~66,000 and non-interest expense decreased $~~150,000~~1.2 million during the three months ended ~~December~~June 3130, ~~2011~~2012 compared to the same period in ~~2010~~2011. Return on equity for the three months ended ~~December~~June 3130, ~~2011~~2012 was (412.~~14)~~ 29% compared to 4.2231% for the three month period ended ~~December~~ 31June 30, ~~2010~~2011. Return on assets was (1.~~41)~~ 26% for quarter ended ~~December~~June 3130, ~~2011~~2012 compared to 0.0242% for the same period in the previous fiscal year.

Interest Income. Total interest income decreased $~~241~~808,000, or 311.67% to $6.51 million for the three months ended ~~December~~June 3130, ~~2011~~2012, from $6.79 million for the three months ended ~~December~~June 3130, ~~2010~~2011, due to a decrease in the volume of our portfolio. The average yield earned on interest-earning assets was 5.4836% for the three months ended ~~December~~June 3130, ~~2011~~2012 compared to 5.4169% for the three months ended ~~December~~June 3130, ~~2010~~2011.

Interest Expense. Total interest expense decreased $~~597~~320,000, or 4232.70% to $~~802~~680,000 for the quarter ended ~~December~~June 3130, ~~2011~~2012, from $~~1.4~~999,000 ~~million~~ for the quarter ended ~~December~~June 3130, ~~2010~~2011. Interest on deposits decreased $~~430~~322,000 to $~~762~~632,000 for the quarter ended ~~December~~June 3130, ~~2011~~2012 from $~~1.2~~954,000 ~~million~~ for the quarter ended ~~December~~June 3130, ~~2010~~2011 due to a decrease in the average rate paid and lower average deposit balances. The average rate paid on deposits was 0.8371% during the three months ended ~~December~~June 3130, ~~2011~~2012 compared to 1.2202% for the three months ended ~~December~~June 3130, ~~2010~~2011. The decrease in the average rate paid on deposits was due primarily to market interest rate changes as well as a change in our deposit mix to more low -cost transaction account deposits and fewer higher -cost certificate accounts. Interest expense on borrowed money ~~decreased~~increased $~~167~~2,000 to $4047,000 for the quarter ended ~~December~~June 3130, ~~2011~~2012 compared to $~~207~~45,000 for the quarter ended ~~December~~June 3130, ~~2010~~2011. AAn ~~decrease~~increase in the average rate paid on borrowings from 0.9019% for the ~~December~~June 3130, ~~2010~~2011 quarter to 0.1723% for the ~~December~~June 3130, ~~2011~~2012 quarter, offset by a ~~slight~~decrease ~~increase~~ in the average balance of borrowings from $9296.03 million to $9380.39 million, accounted for ~~the~~this ~~decrease~~increase. The average rate paid on all interest-bearing liabilities was 0.7061% during the three months ended ~~December~~June 3130, ~~2011~~2012 compared to 10.1685% for the three months ended ~~December~~June 3130, ~~2010~~ 2011.

Provision for Loan Losses. The provision for loan losses ~~increased~~decreased $~~1.3 million~~522,000, or 7173.69%, to $~~3.1~~184,000 ~~million~~ for the three months ended ~~December~~June 3130, ~~2011~~2012, from $~~1.8~~706,000 ~~million~~ for the three months ended ~~December~~June 3130, ~~2010~~2011, primarily as a result of the ~~increased~~decreased level of charge-offs during the period, ~~and~~ management’s analysis of the Bank’s loan portfolio and decrease in average loan balances.

Noninterest Income. Noninterest income decreased $~~163~~66,000, or 146.98%, to $~~934~~908,000 for the three months ended ~~December~~June 3130, ~~2011~~2012, from $~~1.1~~974,000 ~~million~~ for the three months ended ~~December~~June 3130, ~~2010~~2011. Service charges, fees and commissions decreased $~~157~~50,000, or 155.78%, due to a decrease in service charges and fees on loan accounts, secondary mortgage market fee income and service fees on transactional 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 these relationships will continue to be a source of fee and service charge income for the Bank. Other noninterest income decreased $616,000, or 614.05%, to $9096,000 for the three months ended ~~December~~June 3130, ~~2011~~2012 compared to the same period in ~~2010~~2011, primarily due to ~~increases~~decreases in third party relationship income that were ~~not~~ present in the ~~2010~~2011 period.

Noninterest Expense. Noninterest expense decreased $~~150~~1.2 million,~~000,~~ or 322.32%, to $4.41 million for the three months ended ~~December~~June 3130, ~~2011~~2012 compared to the same period last year. The decrease in noninterest expense for the current period resulted primarily from a $~~200~~1.2 million,~~000,~~ or 2576.67% decrease in real estate owned and collection expense and a $177,000, or 7.3% decrease in compensation and benefits, partially offset by a $65132,000, or 19438.63%, increase in ~~data~~professional ~~processing~~ expenses in the current fiscal quarter.

28Taxes. Income tax expense increased $479,000 to $783,000 for the three months ended June 30, 2012, from $304,000 for the three months ended June 30, 2011. The effective tax rate for the June 30, 2011 quarter was 39.1%.

~~Taxes. Income tax expense (benefit) decreased $379,000 to $(354,000) for the three months ended December 31, 2011, from $~~25~~,000 for the three months ended December 31, 2010. The effective tax rate for the December 31, 2011 quarter was 40.1%.~~

Nine Months Ended December 31, 2011 and 2010.

General. Net income for the nine months ended December 31, 2011 increased $246,000, or 50.3%, to $736,000 from $490,000 for the nine months ended December 31, 2010. Net income for the nine months increased due primarily to an increase in net interest income and decrease in the provision for loan losses and was partially offset by an increase in other noninterest expenses. Return on equity for the nine months ended December 31, 2011 was 1.92% compared to 1.3% for the nine month period ended December 31, 2010. Return on assets was .19% for nine months ended December 31, 2011 compared to .12% for the same period in the previous fiscal year.

Interest Income. Total interest income decreased $800,000, or 3.8%, to $20.0 million for the nine months ended December 31, 2011, from $20.8 million for the nine months ended December 31, 2010 due to a decrease in average loan balances. The yield on loans and securities increased from 5.49% to 5.57% for the same periods.

Interest Expense. Total interest expense decreased $1.8 million, or 40.1%, to $2.7 million for the nine months ended December 31, 2011, from $4.5 million for the nine months ended December 31, 2010. Interest on deposits decreased $1.3 million to $2.6 million for the nine months ended December 31, 2011, from $3.9 million for the same period last year due to a decrease in the average rate paid on deposit balances and a decrease in average deposit balances. The rate paid on deposits decreased from 1.33% for the nine months ended December 31, 2010 to .93% for the same period in the current fiscal year. The decrease in the average rate paid on deposits was due primarily to market changes as well as a change in our deposit mix to more low cost transaction account deposits and less higher cost certificate accounts. Interest expense on borrowed money decreased $514,000 to $124,000 for the nine months ended December 31, 2011 from $638,000 for the nine months ended December 31, 2010 primarily due to a decrease in the average rate on borrowing balances and to a lesser extent a decrease in the average outstanding balance on borrowings. The average balance of borrowings decreased from $99.0 million for the nine months ended December 31, 2010 to $95.4 million for the nine months ended December 31, 2011 as our funding needs declined. The average rate paid on borrowings decreased from .86% for the nine months ended December 31, 2010 to .17% for the nine month period ended December 31, 2011.

Provision for Loan Losses. The provision for loan losses decreased $672,000, or 12.1%, to $4.9 million for the nine months ended December 31, 2011 from $5.5 million for the nine months ended December 31, 2010, primarily as a result of the decreased level of charge-offs during the period, partially offset by an increase to the provision after management’s analysis of the Bank’s loan portfolio. Charge-offs totaled $3.2 million during the nine month period ended December 31, 2011, compared to $5.7 million during the same period in 2010, and were related to residential real estate loans, commercial business loans, commercial real estate loans and repossessed vehicles.

Noninterest Income. Noninterest income decreased $273,000, or 8.7%, to $2.9 million for the nine months ended December 31, 2011, from $3.2 million for the nine months ended December 31, 2010 due to a decrease in service charges and fees on loan accounts, a decrease in service charges and fees on transactional accounts and a decrease in secondary mortgage market fee income. Other noninterest income increased $21,000, or 7.8%, to $288,000 for the nine months ended December 31, 2011 compared to the same period in 2010, primarily due to increases in third party relationship income that were not present in the 2010 period.

Noninterest Expenses. Noninterest expenses increased $1.1 million, or 8.0%, to $14.2 million for the nine months ended December 31, 2011, compared to $13.1 million for the same period last year. The increase in noninterest expense resulted primarily from a $1.0 million, or 58.9% increase in real estate owned and collection costs and a $278,000, or 4.0% increase in compensation, partially offset by a $202,000 decrease in FDIC insurance premiums. The increase in real estate owned and collections expense was related to holding and disposition costs and additional provisions on real estate owned properties. The increase in compensation related expenses are generally merit increases.

Taxes. Taxes increased to $350,000 for the nine months ended December 31, 2011, from $244,000 for the nine months ended December 31, 2010. The effective tax rate decreased to 32.2% for the December 31, 2011 period from 33.3% for the same period ended December 31, 2010.

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, ~~2011~~2012.

CONTRACTUAL OBLIGATIONS

There has not been a significant change in our contractual obligations from the information reported in our annual report on form 10-K for the period ended March 31, ~~2011~~2012.

RECENT ACCOUNTING PRONOUNCEMENTS

In ~~January~~April ~~2010~~2011, the ~~Financial Accounting Standards Board (~~FASB) issued ~~Accounting Standards Update (~~ASU) ~~2010~~2011-0603, “~~Fair~~Transfers ~~Value Measurements~~ and ~~Disclosures~~Servicing (Topic ~~820~~860): ~~Improving~~– ~~Disclosures~~Reconsideration ~~about~~of ~~Fair~~Effective ~~Value~~Control ~~Measurements~~for Repurchase Agreements.” The amendments in this ASU ~~2010-06~~remove ~~amends~~from ~~Subtopic~~the ~~820-10~~assessment toof ~~clarify~~effective ~~existing~~control ~~disclosures,~~(1) ~~require~~the ~~new~~criterion ~~disclosures,~~requiring ~~and~~the ~~includes~~transferor ~~conforming~~to ~~amendments~~have the ability to ~~guidance~~repurchase or redeem the financial assets on ~~employers’~~substantially ~~disclosures~~the ~~about~~agreed ~~postretirement~~terms, ~~benefit~~even ~~plan~~in ~~assets.~~the ~~ASU~~event ~~2010-06~~of isdefault ~~effective~~by ~~for~~the ~~interim~~transferee and ~~annual~~(2) ~~periods~~the ~~beginning~~collateral ~~after~~maintenance ~~December~~implementation ~~15,~~guidance ~~2009,~~related ~~except~~to ~~for~~that ~~disclosures~~criterion. The ~~about~~amendments ~~purchases,~~in ~~sales,~~this ~~issuances,~~ASU ~~and~~are ~~settlements~~effective infor the ~~roll~~first ~~forward~~interim ofor ~~activity~~annual inperiod ~~Level~~beginning 3on ~~fair~~or ~~value~~after ~~measurements~~December 15, 2011. The ~~Those disclosures~~guidance ~~are~~should ~~effective~~be ~~for~~applied ~~fiscal~~prospectively ~~years~~to ~~beginning~~transactions ~~after~~or ~~December~~modifications ~~15,~~of ~~2010~~existing ~~and~~transactions ~~for~~that ~~interim~~occur ~~periods~~on ~~within~~or ~~those~~after ~~fiscal~~the ~~years~~effective date. Early adoption is not permitted. The adoption of the new guidance ~~did~~is not expected to have a material impact on the ~~Company~~Corporation’s consolidated financial statements.

In ~~July~~May ~~2010~~2011, the FASB issued ASU ~~2010~~2011-2004, “~~Receivables~~Fair Value Measurement (Topic ~~310~~820) – ~~Disclosures~~Amendments ~~about~~to ~~the~~Achieve ~~Credit~~Common ~~Quality~~Fair ofValue ~~Financing~~Measurement ~~Receivables~~ and ~~the~~Disclosure ~~Allowance~~Requirements ~~for~~in ~~Credit Losses~~U.~~” The~~S. ~~new~~GAAP ~~disclosure~~and ~~guidance~~IFRSs.” This ~~significantly~~ASU ~~expands~~is the ~~existing~~result ~~requirements~~of ~~and~~joint ~~will~~efforts ~~lead~~by tothe ~~greater~~FASB ~~transparency~~and ~~into~~International aAccounting ~~company’s~~Standards ~~exposure~~Board (IASB) to ~~credit~~develop ~~losses~~a ~~from~~single, ~~lending~~converged ~~arrangements. The~~fair ~~extensive~~value ~~new~~framework ~~disclosures~~on ofhow ~~information~~(not aswhen) ofto ~~the~~measure ~~end~~fair ofvalue aand ~~reporting~~what ~~period~~disclosures ~~became~~to ~~effective~~provide ~~for~~about ~~both~~fair ~~interim~~value ~~and~~measurements. The ~~annual~~ASU ~~reporting~~is ~~periods~~largely ~~ending~~consistent onwith orexisting ~~after~~fair ~~December~~value ~~15,~~measurement ~~2010~~principles in U. ~~Specific~~S. ~~disclosures~~GAAP ~~regarding~~(Topic ~~activity~~820), ~~that~~with ~~occurred~~many ~~before~~of the ~~issuance~~amendments ofmade ~~the~~to ~~ASU,~~eliminate ~~such~~unnecessary aswording ~~the~~differences ~~allowance~~between ~~roll~~U.S. ~~forward~~ GAAP and ~~modification~~International ~~disclosures,~~Financial ~~will~~Reporting beStandards ~~required~~(IFRS). The amendments are effective for ~~periods~~interim ~~beginning~~and onannual orperiods beginning after December 15, ~~2010~~2011 with prospective application. Early application is not permitted. The ~~Company~~Corporation ~~has~~does ~~included~~not expect the ~~required~~adoption ~~disclosures~~of inASU ~~its~~2011-04 to have a material impact on the Corporation’s consolidated financial statements.

In ~~December~~June ~~2010~~2011, the FASB issued ASU ~~2010~~2011-2805, “~~Intangible~~Comprehensive Income (Topic 220) – ~~Goodwill~~Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and ~~Other~~transparency ~~(Topic~~of ~~350)~~financial –reporting ~~When~~and to ~~Perform~~increase ~~Step~~the 2prominence of items reported in other comprehensive income by eliminating the ~~Goodwill~~option ~~Impairment~~to ~~Test~~present ~~for~~components ~~Reporting~~of ~~Units~~other ~~with~~comprehensive ~~Zero~~income oras ~~Negative~~part ~~Carrying~~of ~~Amounts~~the statement of changes in stockholders’ equity.” The amendments require that all non-owner changes in ~~this~~stockholders’ ~~ASU~~equity ~~modify~~be ~~Step~~presented 1either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the ~~goodwill~~components ~~impairment~~of ~~test~~net income, a total for ~~reporting~~net ~~units~~income, ~~with~~the ~~zero~~components orof ~~negative~~other ~~carrying~~comprehensive ~~amounts~~income, a total for other comprehensive income, and a total for comprehensive income. In ~~For~~the ~~those~~two-statement ~~reporting~~approach, ~~units~~the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity isto ~~required~~present tocomponents ~~perform~~of ~~Step~~other 2comprehensive income either net of ~~the~~related ~~goodwill~~tax ~~impairment~~effects ~~test~~or ifbefore itrelated istax ~~more~~effects, ~~likely~~or ~~than~~the ~~not~~calculation ~~that~~or areporting ~~goodwill~~of ~~impairment~~earnings ~~exists~~per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, ~~2010~~2011. Early adoption is ~~not~~permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The ~~adoption~~Corporation ofdoes not expect the ~~new~~adoption ~~guidance~~of ~~did~~ASU ~~not~~2011-05 to have a material impact on the ~~Company~~Corporation’s consolidated financial statements.

In ~~December~~September ~~2010~~2011, the FASB issued ASU ~~2010~~2011-2908, “~~Business~~Intangible ~~Combinations~~– Goodwill and Other (Topic ~~805~~350) – ~~Disclosure~~Testing ofGoodwill ~~Supplementary Pro Forma Information~~ for ~~Business Combinations~~Impairment.” The ~~guidance~~amendments ~~requires~~in ~~pro~~this ~~forma~~ASU ~~disclosure~~permit ~~for~~an ~~business~~entity ~~combinations~~to ~~that~~first ~~occurred~~assess inqualitative ~~the~~factors ~~current~~related ~~reporting~~to ~~period~~goodwill asto ~~though~~determine ~~the~~whether ~~acquisition~~it ~~date~~is ~~for~~more ~~all~~likely ~~business~~than ~~combinations~~not that ~~occurred during~~ the ~~year~~fair ~~had~~value ~~been as~~ of the ~~beginning~~reporting ofunit ~~the~~is ~~annual~~less ~~reporting~~than ~~period. If~~its ~~comparative~~carrying ~~financial~~amount ~~statements~~as ~~are~~a ~~presented,~~basis ~~the~~for ~~pro~~determining ~~forma~~whether ~~information~~it ~~should~~is benecessary ~~reported~~to asperform ~~though~~ the ~~acquisition~~two-step ~~date~~goodwill ~~for~~test ~~all~~described ~~business~~in ~~combinations~~Topic ~~that~~350. The ~~occurred~~more-likely-than-not ~~during~~threshold ~~the~~is ~~current~~defined ~~year~~as ~~had~~having ~~been~~a aslikelihood of ~~the~~more ~~beginning~~than ~~of the~~50 ~~comparable~~percent. Under ~~prior~~the ~~annual~~amendments ~~reporting~~in ~~period.~~ this ASU, ~~2010-29~~an entity is ~~effective~~not ~~for~~required ~~business~~to ~~combinations~~calculate ~~for which~~ the ~~acquisition~~fair ~~date~~value isof ona orreporting ~~after~~unit unless the ~~beginning~~entity ofdetermines ~~the~~that ~~first~~it ~~annual~~is ~~reporting~~more ~~period~~likely ~~beginning~~than onnot orthat ~~after~~its ~~December~~fair ~~15,~~value ~~2010. Early~~is ~~adoption~~less isthan ~~permitted.~~its carrying amount. The ~~adoption~~amendments ofin ~~the~~this ~~new~~ASU ~~guidance~~are ~~did~~effective ~~not~~for ~~have~~annual aand ~~material~~interim ~~impact~~goodwill onimpairment ~~the~~tests ~~Company’s~~performed ~~consolidated~~for ~~financial~~fiscal ~~statements.~~years beginning after

3026

~~The~~December ~~Securities Exchange Commission (SEC) issued Final Rule No. 33-9002~~15, ~~“Interactive Data to Improve Financial Reporting~~2011.” ~~The~~Early ~~rule~~adoption ~~requires~~is ~~companies~~permitted, toincluding ~~submit~~for ~~financial~~annual ~~statements~~and ininterim ~~extensible~~goodwill ~~business~~impairment ~~reporting~~tests ~~language~~performed ~~(XBRL) format~~as ~~with~~of ~~their SEC filings on~~ a ~~phased-in~~date ~~schedule. Large~~before ~~accelerated~~September ~~filers~~15, ~~and~~2011, ~~foreign~~if ~~large~~an ~~accelerated~~entity’s ~~filers~~financial ~~using~~statements ~~U.S.~~for ~~GAAP~~the ~~were~~most ~~required~~recent toannual ~~provide~~or ~~interactive~~interim ~~data~~period ~~reports~~have ~~starting~~not ~~with~~yet ~~their~~been ~~first quarterly report for fiscal periods ending on or after June 15, 2010~~issued. ~~All~~The ~~remaining~~adoption ~~filers~~of ~~are~~the ~~required~~new toguidance ~~provide~~did ~~interactive~~not ~~data~~have ~~reports~~a ~~starting~~material ~~with~~impact ~~their first quarterly report for fiscal periods ending~~ on orthe ~~after~~Corporation’s ~~June~~consolidated ~~15,~~financial ~~2011~~statements.

In ~~March~~December 2011, the ~~SEC~~FASB issued ~~Staff~~ASU ~~Accounting~~2011-11, ~~Bulletin~~“Balance Sheet (~~SAB~~Topic 210) ~~114~~– Disclosures about Offsetting Assets and Liabilities.” This ~~SAB~~ASU ~~revises~~requires orentities ~~rescinds~~to ~~portions~~disclose ofboth ~~the~~gross ~~interpretive~~information ~~guidance~~and ~~included~~net ininformation ~~the~~about ~~codification~~both ofinstruments ~~the~~and ~~Staff~~transactions ~~Accounting~~eligible ~~Bulletin~~for ~~Series. This~~offset ~~update~~in isthe ~~intended~~balance tosheet ~~make~~and ~~the~~instruments ~~relevant~~and ~~interpretive~~transactions ~~guidance~~subject ~~consistent~~to ~~with~~an ~~current~~agreement ~~authoritative~~similar ~~accounting~~to ~~guidance~~a ~~issued~~master asnetting aarrangement. An ~~part~~entity ofis required to apply the ~~FASB’s~~amendments ~~Codification. The~~for ~~principal~~annual ~~changes~~reporting ~~involve~~periods ~~revision~~beginning on or ~~removal~~after ofJanuary ~~accounting~~1, ~~guidance~~2013, ~~references~~ and ~~other~~interim ~~conforming~~periods ~~changes~~within tothose ~~ensure~~annual ~~consistency~~periods. An ofentity ~~referencing~~should ~~through~~provide the ~~SAB~~disclosures ~~Series. The~~required ~~effective~~by ~~date~~those ~~for~~amendments ~~SAB~~retrospectively ~~114~~for isall ~~March~~comparative ~~28,~~periods ~~2011~~presented. The ~~adoption~~Corporation ofdoes not expect the ~~new~~adoption ~~guidance did~~of ~~not~~ASU 2011-11 to have a material impact on ~~the~~its ~~Company’s~~ consolidated financial statements.

In ~~January~~December 2011, the FASB issued ASU 2011-0112, “~~Receivables~~Comprehensive Income (Topic ~~310~~220) – Deferral of the Effective Date for Amendments to the Presentation of ~~Disclosures~~Reclassifications ~~about~~of ~~Troubled~~Items ~~Debt~~Out ~~Restructurings~~of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments inare ~~this~~being ~~ASU~~made ~~temporarily~~to ~~delayed~~allow the ~~effective~~Board ~~date~~time to redeliberate whether to present on the face of the ~~disclosures~~financial ~~about~~statements ~~troubled~~the ~~debt~~effects ~~restructurings~~of inreclassifications ~~Update~~out ~~2010-20~~of accumulated other comprehensive income on the components of net income and other comprehensive income for ~~public~~all ~~entities~~periods presented. ~~The~~While ~~delay~~the ~~was~~Board ~~intended~~is toconsidering ~~allow~~the operational concerns about the ~~Board~~presentation ~~time~~requirements tofor ~~complete~~reclassification ~~its~~adjustments ~~deliberations~~and onthe ~~what~~needs ~~constitutes~~of afinancial ~~troubled~~statement ~~debt~~users ~~restructuring.~~for ~~The~~additional ~~effective~~information ~~date~~about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the ~~new~~presentation ~~disclosures~~requirements ~~about~~in ~~troubled~~effect ~~debt~~before ~~restructurings~~ASU ~~for~~2011-05. All ~~public~~other ~~entities~~requirements ~~and~~in ASU 2011-05 are not affected by ASU 2011-12, including the ~~guidance~~requirement ~~for~~to ~~determining~~report ~~what~~comprehensive ~~constitutes~~income either in a ~~troubled~~single ~~debt~~continuous ~~restructuring~~financial ~~was~~statement ~~effective~~or in two separate but consecutive financial statements. Public entities should apply these requirements for ~~interim~~fiscal years, and ~~annual~~ interim periods ~~ending~~within those years, beginning after ~~June~~December 15, 2011. The ~~adoption~~Corporation ofdoes not expect the ~~new~~adoption ~~guidance~~of ~~did~~ASU ~~not~~2011-12 to have a material impact on the ~~Company~~Corporation’s consolidated financial statements.

In April 2011, the FASB issued ASU 2011-02, “Receivables (Topic 310) – A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” The amendments in this ASU clarify the guidance on a creditor’s evaluation of whether it has granted a concession to a debtor. They also clarify the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulty. The amendments in this ASU are effective for the first interim or annual period beginning on or after June 15, 2011. Early adoption is permitted. Retrospective application to the beginning of the annual period of adoption for modifications occurring on or after the beginning of the annual adoption period is required. As a result of applying these amendments, an entity may identify receivables that are newly considered to be impaired. For purposes of measuring impairment of those receivables, an entity should apply the amendments prospectively for the first interim or annual period beginning on or after June 15, 2011. The Company has adopted ASU 2011-02 and included the required disclosures in its consolidated financial statements.

In April 2011, the FASB issued ASU 2011-03, “Transfers and Servicing (Topic 860) – Reconsideration of Effective Control for Repurchase Agreements.” The amendments in this ASU remove from the assessment of effective control (1) the criterion requiring the transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee and (2) the collateral maintenance implementation guidance related to that criterion. The amendments in this ASU are effective for the first interim or annual period beginning on or after December 15, 2011. The guidance should be applied prospectively to transactions or modifications of existing transactions that occur on or after the effective date. Early adoption is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” This ASU is the result of joint efforts by the FASB and IASB to develop a single, converged fair value framework on how (not when) to measure fair value and what disclosures to provide about fair value measurements. The ASU is largely consistent with existing fair value measurement principles in U.S. GAAP (Topic 820), with many of the amendments made to eliminate unnecessary wording differences between U.S. GAAP and IFRSs. The amendments are effective for interim and annual periods beginning after December 15, 2011 with prospective application. Early application is not permitted. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220) – Presentation of Comprehensive Income.” The objective of this ASU is to improve the comparability, consistency and transparency of financial reporting and to increase the prominence of items reported in other comprehensive income by eliminating the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity. The amendments require that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single statement of comprehensive income should include the components of net income, a total for net income, the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. In the two-statement approach, the first statement should present total net income and its components followed consecutively by a second statement that should present all the components of other comprehensive income, a total for other comprehensive income, and a total for comprehensive income. The amendments do not change the items that must be reported in other comprehensive income, the option for an entity to present components of other comprehensive income either net of related tax effects or before related tax effects, or the calculation or reporting of earnings per share. The amendments in this ASU should be applied retrospectively. The amendments are effective for fiscal years and interim periods within those years beginning after December 15, 2011. Early adoption is permitted because compliance with the amendments is already permitted. The amendments do not require transition disclosures. The Company is currently assessing the impact that ASU 2011-05 will have on its consolidated financial statements.

In August 2011, the SEC issued Final Rule No. 33-9250, “Technical Amendments to Commission Rules and Forms related to the FASB’s Accounting Standards Codification.” The SEC has adopted technical amendments to various rules and forms under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940. These revisions were necessary to conform those rules and forms to the FASB Accounting Standards Codification. The technical amendments include revision of certain rules in Regulation S-X, certain items in Regulation S-K, and various rules and forms prescribed under the Securities Act, Exchange Act and Investment Company Act. The Release was effective as of August 12, 2011. The adoption of the new guidance did not have a material impact on the Company’s consolidated financial statements.

In September 2011, the FASB issued ASU 2011-08, “Intangible – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.” The amendments in this ASU permit an entity to first assess qualitative factors related to goodwill to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill test described in Topic 350. The more-likely-than-not threshold is defined as having a likelihood of more than 50 percent. Under the amendments in this ASU, an entity is not required to calculate the fair value of a reporting unit unless the entity determines that it is more likely than not that its fair value is less than its carrying amount. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company is currently assessing the impact that ASU 2011-08 will have on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, “Balance Sheet (Topic 210) – Disclosures about Offsetting Assets and Liabilities.” This ASU requires entities to disclose both gross information and net information about both instruments and transactions eligible for offset in the balance sheet, and instruments and transactions subject to an agreement similar to a master netting arrangement. An entity is required to apply the amendments for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The Company is currently assessing the impact that ASU 2011-11 will have on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-12, “Comprehensive Income (Topic 220) – Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05.” The amendments are being made to allow the Board time to redeliberate whether to present on the face of the financial statements the effects of reclassifications out of accumulated other comprehensive income on the components of net income and other comprehensive income for all periods presented. While the Board is considering the operational concerns about the presentation requirements for reclassification adjustments and the needs of financial statement users for additional information about reclassification adjustments, entities should continue to report reclassifications out of accumulated other comprehensive income consistent with the presentation requirements in effect before Update 2011-05. All other requirements in Update 2011-05 are not affected by this Update, including the requirement to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. The Company is currently assessing the impact that ASU 2011-12 will have 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;, and general economic conditions, either nationally or regionally, may be less favorable than expected, resulting in, among other things, a deterioration in the credit quality of our loans and other assets and a reduction in the value of the collateral securing our loans;

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

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

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

the credit risks of lending activities, including changes in the level and trend of loan delinquencies and charge-offs;

fluctuations in the demand for loans, the number of unsold homes and other properties and fluctuations in real estate values in our market areas;

results of examinations by the OCC or other regulatory authorities, including the possibility that any such regulatory authority may, among other things, require us to enter into a formal enforcement action or to increase our allowance for loan losses, write-down assets, change our regulatory capital position or affect our ability to borrow funds or maintain or increase deposits, which could adversely affect our liquidity and earnings;

our ability to attract and retain deposits;

further increases in premiums for deposit insurance;

our ability to control operating costs and expenses;

the uncertainties arising from our participation in the Treasury Department’s TARP program including scheduled dividend rate increases on and future redemption of our TARP preferred stock;

the timely development of and acceptance of new products and services of 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) may adversely affect the business in which we are engaged;

the impact of technological changes;

increased competitive pressures among financial services companies;

adverse changes in the securities markets;

changes in accounting policies and practices, as may be adopted by the financial institution regulatory agencies, the Public Company Accounting Oversight Board or the Financial Accounting Standards Board;

changes in consumer spending and saving habits; and

our success at managing the risks involved in the foregoing.

34Any of the forward-looking statements are based upon management’s beliefs and assumptions at the time they are made. We undertake no obligation to publicly update or revise any forward-looking statements included in this Form 10-Q or to update the reasons why actual results could differ from those contained in such statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking statements discussed in this Form 10-Q might not occur and you should not put undue reliance on any forward-looking statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in market risk since our March 31, ~~2011~~2012 year end. Market risk is discussed as part of management’s discussion and analysis under asset/liability management in the Company’s annual report on ~~form~~Form 10-K for March 31, ~~2011~~2012.

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 ~~December~~June 3130, ~~2011~~2012, was carried out under the supervision of and with the participation of the Company's Chief Executive Officer, Chief Financial Officer and several other members of the Company's senior management. The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures in effect as of ~~December~~June 3130, ~~2011~~2012, 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 ~~December~~June 3130, ~~2011~~2012, 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.

35The Company intends to continually review and to evaluate the design and effectiveness of its disclosure controls and procedures and to improve its controls and procedures over time and to correct any deficiencies that it may discover in the future. The goal is to ensure that senior management has timely access to all material financial and non-financial information concerning the Company’s business. While the Company believes the present design of its disclosure controls and procedures is effective to achieve its goal, future events affecting its business may cause the Company to modify its disclosure controls and procedures.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Not ~~Applicable~~applicable.

Item 1A. Risk Factors

Not required for smaller reporting company

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

Not ~~Applicable~~applicable.

Item 3. Defaults Upon Senior Securities

Not ~~Applicable~~applicable.

Item 4. ~~(Removed~~Mine ~~and~~Safety ~~Reserved)~~Disclosures

Not ~~Applicable~~applicable.

Item 5. Other Information

Entry into a Material Definitive Agreement

On August 9, 2012, the Bank entered into a written agreement with the OCC (the “Agreement”) to address the OCC’s concerns about the troubled condition of the Bank. Among other things, the Agreement requires the Bank to: (1) adopt and implement a plan to reduce non-performing and troubled assets; (2) adopt a capital plan; (3) maintain competent senior management; (4) obtain OCC approval of dividends; (5) adopt a program to improve credit risk management; (6) provide for quarterly Board review of the Bank’s allowance for loan and lease losses; and (7) develop plans to improve earnings and increase liquidity. A copy of the Agreement is included in Exhibit 10.15 to this Form 10-Q.

Item 6. Exhibits

See Exhibit Index

Exhibit Number		Document
2.1		Agreement and Plan of Merger, dated as of August 2, 2012, by and among Community Financial Corporation, Inc., Community Bank, City Holding Company and City National Bank of West Virginia, filed on August 3, 2012, as Exhibit 2.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.

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

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

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

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

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

10.1		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.

10.2		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.

10.3		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.

10.4		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.

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

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

3631

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

10.8		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.

10.9		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.

10.10		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.

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

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

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

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

10.15		Agreement By and Between Community Bank, Staunton, Virginia and the Comptroller of the Currency, dated August 9, 2012

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

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

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

32		Section 1350 Certifications

101

Interactive Data File*

Financial Statements from the Company’s Form 10-Q for the year ended June 30, 2012, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at June 30, 2012 (unaudited) and March 31, 2012; (ii) Consolidated Statements of Operations for the Three Months Ended June 30, 2012 and 2011 (unaudited); (iii) Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011 (Unaudited)and 2011; and (v) Notes to Unaudited Interim Consolidated Financial Statements, as follows:

101.INS cffc – 20120630.xml

101.SCH cffc – 20120630.xsd

101.CAL cffc – 20120630_cal.xml

101.DEF cffc – 20120630_def.xml

101.LAB cffc – 20120630_lab.xml

101.PRE cffc – 20120630_pre.xml

*In accordance with rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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: February 13, 2012	By:	/s/ R. Jerry Giles
Date: August 13, 2012	By:	/s/ R. Jerry Giles
		R. Jerry Giles Chief Financial Officer (Duly Authorized Officer)

3734

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.
10.15		Agreement By and Between Community Bank, Staunton, Virginia and the Comptroller of the Currency, dated August 9, 2012
3.2		Certificate of Amendment and Articles of Amendment for the Series A Preferred Stock, filed on December 22, 2008, as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
31.1		Rule 13(a)-14(a) Certification (Chief Executive Officer)
3.3		Bylaws, as amended and restated, filed on December 20, 2007 as Exhibit 3.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
31.2		Rule 13(a)-14(a) Certification (Chief Financial Officer)
4.1		Registrant’s Specimen Common Stock Certificate, filed on June 29, 1999 as Exhibit 4 to the Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 1999, is incorporated herein by reference.
32		Section 1350 Certifications
4.2		Registrant’s Form of Certificate for the Series A Preferred Stock, filed on December 22, 2008, as Exhibit 4.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
101		Interactive Data File* Financial Statements from the Company’s Form 10-Q for the year ended June 30, 2012, formatted in Extensive Business Reporting Language (XBRL); (i) Consolidated Balance Sheets at June 30, 2012 (unaudited) and March 31, 2012; (ii) Consolidated Statements of Operations for the Three Months Ended June 30, 2012 and 2011 (unaudited); (iii) Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2012 and 2011 (Unaudited)and 2011; and (v) Notes to Unaudited Interim Consolidated Financial Statements, as follows: 101.INS cffc – 20120630.xml 101.SCH cffc – 20120630.xsd 101.CAL cffc – 20120630_cal.xml 101.DEF cffc – 20120630_def.xml 101.LAB cffc – 20120630_lab.xml 101.PRE cffc – 20120630_pre.xml *In accordance with rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
4.3		Registrant’s Form of Warrant for Purchase of Shares of Common Stock, filed on December 22, 2008, as Exhibit 4.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
10.1		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.
10.2		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.
10.3		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.
10.4		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.
10.5		Salary Continuation Agreements by and between Community Bank and Officers Giles, Smiley and Werner filed on June 29, 2004 as an exhibit to the Registrant’s Annual Report on Form 10-KSB (SEC File No. 000-18265) for the fiscal year ended March 31, 2004, and incorporated herein by reference.
10.6		Form of Director Deferred Fee Agreement, as amended, filed on June 29, 2005 as an exhibit to the Registrant’s Annual Report on Form 10-K (SEC File No. 000-18265) for the fiscal year ended March 31, 2005, is incorporated herein by reference.
10.7		Registrant’s 2003 Stock Option and Incentive Plan, filed on December 27, 2003 as an exhibit to the Registrant’s Definitive Proxy Statement on Schedule 14A (SEC File No. 000-18265), is incorporated herein by reference.
10.8		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.

10.9		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.
10.10		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.
10.11		Form of Change in Control Agreement by and between Community Financial Corporation and Lyle Moffett, filed on July 1, 2008 as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
10.12		Form of Change in Control Agreement by and between Community Financial Corporation and John Howerton, filed on November 14, 2008 as an exhibit to the Registrant’s Report on Form 10-Q (SEC File No. 000-18265), is incorporated herein by reference.
10.13		Letter Agreement, including Schedule A, and Securities Purchase Agreement, dated December 19, 2008, between Community Financial Corporation and United States Department of the Treasury, with respect to the issuance and sale of the Series A Preferred Stock and Warrant, filed on December 22, 2008, as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
10.14		Form of Compensation Modification Agreement and Waiver, executed by Norman C. Smiley, III, filed on December 22, 2008, as Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (SEC File No. 000-18265), is incorporated herein by reference.
11		Statement re computation of per share earnings (see Note 3 of the Notes to Unaudited Interim Consolidated Financial Statements included in this Quarterly Report on Form 10-Q).
31.1		Rule 13(a)-14(a) Certification (Chief Executive Officer)
31.2		Rule 13(a)-14(a) Certification (Chief Financial Officer)
32		Section 1350 Certifications
101		Interactive Data File* *In accordance with rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

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