The Community Financial Corporation Reports Operating Results for the Three Months Ended March 31, 2018

WALDORF, Md., May 02, 2018 (GLOBE NEWSWIRE) -- The Community Financial Corporation (NASDAQ:TCFC) (the “Company”), the holding company for Community Bank of the Chesapeake (the “Bank”), reported its results of operations for the first quarter ended March 31, 2018. Highlights at and for the three months ended March 31, 2018 (“2018Q1”) include:

Three Month Highlights

• Completed acquisition of $200 million County First Bank (“County First”) on January 1, 2018, increasing the Company’s asset size to just under $1.6 billion. In January 2018, the Company disclosed its intentions to close four of the five acquired County First branches during the second quarter with the La Plata downtown branch remaining open.
   
• Gross loans increased 11.3% or $129.6 million from $1,150.0 million at December 31, 2017 (“2017Q4”) to $1,279.7 million at 2018Q1, primarily due to County First.
   
• Transaction deposit accounts increased from 59% of deposits at 2017Q4 to 63% of deposits at 2018Q1.
   
• Retention of County First deposit relationships have been successful to date. Acquired deposit balances increased $2.3 million from $199 million at the acquisition date to $201 million at March 31, 2018.  
   
• Wholesale funding as a percentage of assets decreased from 18.7% at 2017Q4 to 12.5% at 2018Q1. Wholesale funding includes traditional brokered deposits and Federal Home Loan Bank (“FHLB”) advances.
   
• Classified loans as a percentage of assets decreased 74 basis points from 3.58% at December 31, 2017 to 2.84% at March 31, 2018.
   
• Non-accrual loans, OREO and TDRs to total assets increased five basis points from 1.71% at December 31, 2017 to 1.76% at March 31, 2018.
   
• Tier 1 leverage ratio increased to 9.35% compared to 8.77% at December 31, 2017.
   
• Net income of $1.2 million, or $0.22 per share, compared to a net loss of $459,000, or ($0.10) per share, in the quarter ended December 31, 2017 (“2017Q4”). The Company’s return on average assets (“ROAA”) and return on average common equity (“ROACE”) were 0.31% and 3.33% in 2018Q1 compared to (0.13%) and (1.62%) in the prior quarter. 
   
• Operating net income¹ increased $845,000 (33.7%) to $3.4 million, or $.0.61 per share, compared to $2.5 million, or $0.54 per share, in the prior quarter. The Company’s operating ROAA and operating ROACE were 0.85% and 9.15% in 2018Q1 compared to 0.72% and 8.89% in the prior quarter. 
   
• Net interest margin increased 25 basis points from 3.29% in 2017Q4 to 3.54% in 2018Q1. Net interest income increased $2.2 million or 20.8%, to $12.4 million in 2018Q1 compared to 10.7 million in 2017Q4.
   
• Noninterest expense of $11.7 million in 2018Q1 increased $3.9 million compared to $7.7 million in the prior quarter, primarily due to the County First acquisition. Merger and acquisition costs of $2.9 million were recorded in 2018Q1 as well as additional costs related to supporting five operating County First branches. The Company will continue to carry additional noninterest expense in the second and third quarters until the four branch closures are complete and duplicate vendors and processes are discontinued.
   
• Noninterest expense of $8.8 million in 2018Q1, excluding merger and acquisition costs, increased $1.4 million compared to $7.4 million in the prior quarter due to the impact of County First. These costs reflected management’s expected expense run rate of between $8.9 and $9.1 million for the first two quarters of 2018.
   
• The GAAP efficiency ratio was 83.81% in 2018Q1 compared to 65.79% in 2017Q4. The Non-GAAP (or “operating”) efficiency ratio², which excludes merger and acquisition costs, OREO gains and losses and other non-core activities, was 62.39% in 2018Q1 compared to 62.16% in 2017Q4.

“Once our acquisition was approved by our regulators in the fall of 2017, we began diligently working with the County First Board and management to ensure an orderly and smooth transition of our most important resource – our customers,” stated Michael L. Middleton, Chairman of the Board. “After the January closing, our management team seamlessly integrated the various customer delivery platforms into our system. This transaction has deepened our market penetration and positions us for future growth throughout our footprint.”

“Return on average assets and earnings per share improved to 0.31% and $0.22 in the first quarter of 2018 compared (0.13%) and $(0.10) in the fourth quarter. Operating return on average assets and operating earnings per share improved to 0.85% and $0.61 in the first quarter of 2018 from 0.72% and $0.54 in the fourth quarter,” stated William J. Pasenelli, Chief Executive Officer and Vice-Chairman of the Board. “We were very excited to complete our merger on January 1, 2018. Community Bank of the Chesapeake is now even better positioned at $1.6 billion in assets to compete in the Southern Maryland market given our strong leadership team, experienced bankers, distinctive product capabilities and strong balance sheet.

The improvement in core earnings compared to the prior quarter was the result of increased net interest income and net interest margin, while continuing our focus on expense control. Net interest margin increased 25 basis points to 3.54% in the first quarter of 2018 compared to 3.29% in the fourth quarter of 2017. Net interest margin increased due to the acquisition of low cost transaction deposits and higher yielding loans from County First, the continued trend of higher loan yields on repricing loans and new loans, and the pay down of wholesale funding during the first quarter. The accretion of the purchase accounting fair value mark was $321,000, representing approximately 10 basis points of the net interest margin expansion.

The operating efficiency ratio was stable at 62.39% in the first quarter of 2018 compared to 62.16% in the fourth quarter of 2017. It was encouraging to see top line revenue keeping pace with core operating expenses during the first quarter as we are not expecting to see the full impact of cost savings until the second half of 2018. Management remains focused on controlling expenses and the successful integration of County First customers. We will continue to mitigate the risks that NIM expansion will not continue for the balance of 2018 by focusing on controlling expenses.”

_________________________________
¹ The Company defines operating net income as net income before merger and acquisition costs and the one-time deferred tax adjustment recorded for Tax Cuts and Jobs Act in the three months ended December 31, 2017.  Operating earnings per share, operating return on average assets and operating return on average common equity is calculated using adjusted operating net income. See Non-GAAP reconciliation schedules.

Income Statement – Three Months Ended March 31, 2018

The Company reported net income of $1.2 million, or $0.22 per share, for the three months ended March 31, 2018 (“2018Q1”). This compares to a net loss of $459,000, or ($0.10) per share, for the three months ended December 31, 2017 (“2017Q4”) and net income of $2.3 million, or $0.51 per share, for the three months ended March 31, 2017 (“2017Q1”). The increase in net income from 2017Q4 resulted primarily from the $2.7 million in additional income tax expense booked in the fourth quarter of 2017 from the revaluation of deferred tax assets due to the reduction in the corporate income tax rate under the recently enacted Tax Cuts and Jobs Act.  The decrease in net income from 2017Q1 resulted primarily from $2.9 million in merger-related costs, which included $1.3 million of termination costs of County First’s core processing contract as well as investment banking, legal fees and the costs of employee agreements and severance for terminations that occurred as of the end of the quarter. In addition, the Company will continue to carry additional noninterest expense in the second and third quarters until the four branch closures are complete and duplicate vendors and processes are discontinued. The increase in noninterest expense was partially offset by an increase in net interest income realized from the integrated operations of County First associated with the January 1, 2018 acquisition and from a lower effective tax rate.

_____________________________

² The Company maintains GAAP and Non-GAAP measures for net operating expenses and noninterest expenses to calculate Non-GAAP ratios. Adjusted net operating expense and adjusted noninterest expense exclude merger and acquisition costs, OREO gains and losses and expenses, and gains and losses on the sale of investments and other assets not considered part of recurring operations. See Reconciliation of GAAP and Non-GAAP financial measures for the calculation of the below ratios:

Efficiency Ratio - noninterest expense divided by the sum of net interest income and noninterest income.

Net Operating Expense Ratio - noninterest expense less noninterest income divided by average assets.

The Company reported operating net income, which excludes merger-related expenses, of $3.4 million, or $0.61 per share, in 2018Q1. This compares to operating net income of $2.5 million, or $0.54 per share, in 2017Q4 and operating net income of $2.3 million, or $0.51 per share, in 2017Q1. Compared to 2017Q4 and 2017Q1, operating net income reflects higher net interest income and higher noninterest income partially offset by higher noninterest expense, much of which is associated with the acquisition of County First.

Net interest income totaled $12.9 million in 2018Q1, which represents a $2.1 million, or 19.7%, increase from $10.8 million in 2017Q4 and a $2.2 million, or 20.8%, increase from $10.7 million in 2017Q1. Average total earning assets increased $149.0 million, or 11.4%, in 2018Q1 to $1,456.9 million, compared to $1,307.9 million in 2017Q4 and increased $202.4 million, or 16.1%, compared to $1,254.5 million in 2017Q1. The increase in average total earning assets in 2018Q1 from 2017Q4 included an increase in average loans of $141.1 million, or 12.5%, and an increase in average investments of $7.9 million, or 4.5%, primarily as a result of the acquisition of County First. The increase in average total earning assets in 2018Q1 from 2017Q1 resulted primarily from a $191.0 million, or 17.6%, increase in average loans as a result of organic growth and the acquisition of County First and a $11.4 million, or 6.6%, increase in average investments.

Net interest margin was 3.54% in 2018Q1, representing a 25 basis point increase from 3.29%. The increase in net interest margin from 2017Q4 resulted primarily from a 19 basis point increase in yield on loans to 4.63%, driven by several quarters of increasing contractual repricing on the Company’s legacy portfolio, the recognition of the acquired performing fair value mark related to the acquisition of County First loans and the addition of higher yielding loans from County First. Additionally, net interest margin was positively impacted by the acquisition of County First’s lower cost transaction deposit accounts and the pay down of wholesale funding with County First cash and the sale of securities in January 2018. The Company’s cost of funds decreased four basis points from 0.88% in 2017Q4 to 0.84% in 2018Q1. During 2018Q1, the County First acquisition and the management of funding more than offset increased rates on deposit accounts and wholesale funding due to the Federal Reserve’s actions to raise short-term interest rates.

Net interest margin of 3.54% was 14 basis points higher than the 3.40% in 2017Q1. The increase in net interest margin from 2017Q1 resulted primarily from a 21 basis point increase in yield on loans, due primarily to higher contractual interest rates on new and repricing loans, the recognition of the acquired performing fair value mark related to County First and the addition of higher yielding loans from the County First acquisition. These increases were partially offset by a decrease in margin due to a 17 basis point increase in the cost of interest-bearing liabilities.  The Company’s cost of funds increased 10 basis points from 0.74% in 2017Q1 to 0.84% in 2018Q1.

Noninterest income of $1.0 million in 2018Q1 increased by $31,000 compared to 2017Q4 and by $151,000 compared to 2017Q1.  The increase in noninterest income was primarily due to additional service charge income from the acquisition of County First’s deposit relationships and from the monthly income earned from approximately $6.3 million of Bank Owned Life Insurance acquired in the transaction.

Noninterest expenses increased $3.9 million, or 50.6%, to $11.7 million in 2018Q1 compared to $7.8 million in 2017Q4, and increased $4.3 million, or 58.1%, compared to $7.4 million in 2017Q1. Adjusted noninterest expense, which excludes merger-related expenses and OREO related expenses increased $1.4 million, or 19.2%, to $8.7 million in 2018Q1 compared to $7.3 million in 2017Q4, and increased $1.5 million, or 21.2%, compared to $7.2 million in 2017Q1. Overall the increases in adjusted noninterest expenses comparing 2018Q1 to 2017Q4 and 2017Q1 were due primarily to increases in salary and employee benefits due to the addition of County First employees. Other increases from the comparable periods were to occupancy expense, data processing expense, core deposit intangible amortization, advertising expense and FDIC insurance expense, all of which were due primarily to the acquisition of County First. The Company has scheduled the closing of four of the five acquired branches in May 2018 with a positive impact on the Company’s expense run rate expected in the second half of 2018 due to lower overhead.

The Company’s GAAP efficiency ratio was 83.81% in 2018Q1 compared to 65.79% in 2017Q4 and 63.89% in 2017Q1. The operating efficiency ratio, which excludes merger and acquisition costs, OREO gains and losses and other non-core activities, was 62.39% and 62.16% and 62.20% for the same comparable periods. The Company’s GAAP net operating expense ratio was 2.69% in 2018Q1 compared to 1.93% in 2017Q4 and 1.94% in 2017Q1. The Non-GAAP net operating expense ratio, which excludes merger and acquisition costs, investment gains and losses, OREO gains and losses and other non-core activities, was 1.94% and 1.81% and 1.89% for the same comparable periods. The following is a summary breakdown of noninterest expense:

The Company’s consolidated effective tax rate was 30.4% in 2018Q1, due to lower tax rates enacted with the passage of the Tax Cut and Jobs Act of 2017 partially offset by certain non-deductible merger-related expenses, true-ups to deferred tax assets and holding company expenses that are not deductible for state tax purposes. The Company’s normal effective rate as of March 31, 2018 was 27.52% (19.27% for federal; 8.25% for state). The Company’s consolidated effective tax rate was 111.48% in 2017Q4 due to $2.7 million in additional income tax expense from the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate of the Tax Cuts and Jobs Act and 38.2% in 2017Q1.  

Balance Sheet
Total assets increased $171.0 million, or 12.2%, to $1.6 billion at 2018Q1 compared to total assets of $1.4 billion at 2017Q4 primarily as a result of the acquisition of County First. Cash and cash equivalents increased $19.0 million, or 123.5%, to $34.5 million and total securities increased $1.7 million, to $169.2 million. Gross loans increased 11.3% or $129.6 million from $1,150.0 million at 2017Q4 to $1,279.7 million at 2018Q1, primarily due to the merger.  The Bank acquired $144.1 million of County First principal loan balances on January 1, 2018. During the first quarter of 2018, there were several County First relationships that the Company encouraged to seek other financing. This contributed to a decrease in the first quarter of $12.3 million in acquired principal balances. Net growth of the Bank’s legacy portfolio was $781,000 with commercial real estate growing $17.4 million at an annual rate of 9.6%, substantially offset by payoffs of other commercial legacy loans primarily from customer sales of underlying collateral.

The acquisition of County First led to a slight shift in loan mix at 2018Q1 compared to 2017Q4. The combination of commercial and industrial and owner-occupied real estate loans increased $21 million from $378 million (33% of loans) at 2017Q1 to $399 million (31% of loans) at 2018Q1. Regulatory concentrations for non-owner occupied commercial real estate and construction decreased from 309.6% and 65.5% at 2017Q4 to 294.2% and 65.3% at 2018Q1. The following is a breakdown of the Company’s loan portfolio at March 31, 2018 and December 31, 2017:

In terms of accounting designations, compared to 2017Q4: (i) non-acquired loans, which include certain renewed and/or restructured acquired performing loans that are re-designated as non-acquired, increased $4.1 million, or 3.6%, to $1,154.2 million; (ii) acquired performing loans increased $121.6 million to $121.6 million; and (iii) purchase credit impaired (“PCI”) loans increased $3.9 million to $3.9 million. At 2018Q1 performing acquired loans, which totaled $121.6 million, included a $2.3 million net acquisition accounting fair market value adjustment, representing a 1.87% “mark;” and PCI loans which totaled $3.9 million, included a $666,000 adjustment, representing a 14.68% “mark.”

Total deposits increased $179.7 million, or 16.2%, to $1,285.9 million at 2018Q1, compared to $1,106.2 million at 2017Q4 due primarily to the acquisition of County First. Noninterest bearing demand deposits increased $69.8 million, or 43.7%, to $229.6 million (17.9% of total deposits). The Company uses both traditional and reciprocal brokered deposits. Traditional brokered deposits were $100.2 million at 2018Q1 compared to $118.9 million at 2017Q4. Reciprocal brokered deposits are used to maximize FDIC insurance available to our customers. Reciprocal brokered deposits were $99.9 million at 2018Q1 compared to $92.9 million at 2017Q4.  Transaction deposit accounts increased $152.8 million from $654.6 million (59% or deposits) at 2017Q4 to $807.5 million (63% of deposits) at 2018Q1. This contributed to deceasing the Bank’s cost of funds four basis points from 0.88% in 2017Q4 to 0.84% in 2018Q1.

FHLB long-term debt and short-term borrowings (“FHLB advances”) decreased $46.0 million, or 32.2%, to $97.0 million at 2018Q1 compared to $143.0 million at 2017Q4. Wholesale funding, which includes traditional brokered deposits and FHLB advances, decreased $64.7 million from $261.9 million (18.7% of assets) at 2017Q4 to $197.2 million (12.5% of assets) at 2018Q1. Cash and the sale of securities from the County First acquisition were used to pay down debt and brokered deposits. The Company uses brokered deposits and other wholesale funding to supplement funding when loan growth exceeds core deposit growth and for asset-liability management purposes.

Total stockholders’ equity increased $35.7 million, or 32.5%, to $145.7 million at 2018Q1 compared to $110.0 million at 2017Q4. This increase primarily resulted from the issuance of 918,526 shares of common stock, valued at $35.6 million (based on the $38.78 per share closing price on the last trading day prior to consummation), as the stock component of the merger consideration paid in the County First acquisition. The Company’s ratio of tangible common equity to tangible assets increased to 8.44% at 2018Q1 from 7.82% at 2017Q4³. The Company’s Common Equity Tier 1 (“CET1”) ratio was 10.31% at 2018Q1 compared to 9.51% at 2017Q4. The Company remains well capitalized with a Tier 1 capital to average assets (leverage ratio) of 9.35% at 2018Q1 compared to 8.79% at 2017Q4.

______________________________
³ The Company had no intangible assets prior to January 1, 2018. Therefore, tangible common equity and tangible assets were the same as common equity and total assets.

Asset Quality
The Company continues to pursue its approach of maximizing contractual rights with individual classified customer relationships. The objective is to expeditiously resolve on-performing or substandard credits that are not likely to become performing or passing credits in a reasonable timeframe. Management believes this strategy is in the best long-term interest of the Company.

Non-accrual loans and OREO to total assets increased from 1.00% at 2017Q4 to 1.13% at 2018Q1.  Non-accrual loans, OREO and TDRs to total assets increased $3.7 million from $24.1 million or 1.71% at 2017Q4 to $27.8 million or 1.76% at 2018Q1. The $3.7 million increase in non-accrual balances was principally due to two well-secured commercial customer relationships that became non-accrual in 2018Q1. The first relationship is a $2.3 million in loans with short-term operational cash flow shortfalls that may be addressed with additional working capital provided by an investor. For the second relationship, in 2018Q1, the Bank charged-off $200,000 of a $2.1 million dollar loan to adjust the loan’s carrying value to the fair value of the collateral, which is a property awaiting the court’s foreclosure ratification. The property was purchased at the foreclosure auction by a third party with no financing being provided by the Bank.

Classified assets decreased $5.6 million from $50.3 million at 2017Q4 to $44.7 million at 2018Q1. Management considers classified assets to be an important measure of asset quality. The following is a breakdown of the Company’s classified and special mention assets at March 31, 2018 and December 31, 2017, 2016, 2015 and 2014, respectively:

The company reported a $500,000 provision for loan loss expense in 2018Q1 compared to $30,000 of provision recorded in 2017Q4, and a provision of $380,000 in 2017Q1. Allowance for loan loss levels decreased to 0.82% of total loans at 2018Q1 compared to 0.91% at 2017Q4 due to the addition of County First loans for which no allowance was provided for in accordance with purchase accounting standards. Net charge-offs of $544,000 were recognized in 2018Q1 compared to net recoveries of $50,000 in 2017Q4, and net charge-offs of $131,000 in 2017Q1. Management’s determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to: overall loss experience; current economic conditions; size, growth and composition of the loan portfolio; financial condition of the borrowers; current appraised values of underlying collateral and other relevant factors that, in management’s judgment, warrant recognition in determining an adequate allowance. Improvements to baseline charge-off factors for the periods used to evaluate the adequacy of the allowance as well as improvements in some qualitative factors, such as slower portfolio growth, were offset by increases in other qualitative factors. The specific allowance is based on management’s estimate of realizable value for particular loans. Management believes that the allowance is adequate.

About The Community Financial Corporation -  Headquartered in Waldorf, MD, The Community Financial Corporation is the bank holding company for Community Bank of the Chesapeake, a full-service commercial bank with assets of approximately $1.6 billion.  Through its branch offices and commercial lending centers, Community Bank of the Chesapeake offers a broad range of financial products and services to individuals and businesses.  The Company’s banking centers are located at its main office in Waldorf, Maryland, and branch offices in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby and California, Maryland; and downtown Fredericksburg, Virginia. More information about Community Bank of the Chesapeake can be found at www.cbtc.com.

Use of Non-GAAP Financial Measures - Statements included in this press release include non-GAAP financial measures and should be read along with the accompanying tables, which provide a reconciliation of non-GAAP financial measures to GAAP financial measures.  The Company’s management uses these non-GAAP financial measures, and believes that non-GAAP financial measures provide additional useful information that allows readers to evaluate the ongoing performance of the Company.  Non-GAAP financial measures should not be considered as an alternative to any measure of performance or financial condition as promulgated under GAAP, and investors should consider the Company’s performance and financial condition as reported under GAAP and all other relevant information when assessing the performance or financial condition of the Company.  Non-GAAP financial measures have limitations as analytical tools, and investors should not consider them in isolation or as a substitute for analysis of the results or financial condition as reported under GAAP.

Forward-looking Statements - This news release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts. They often include words like “believe,” “expect,” “anticipate,” “estimate” and “intend” or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Statements in this release that are not strictly historical are forward-looking and are based upon current expectations that may differ materially from actual results. These forward-looking statements include, without limitation, those relating to the Company’s and Community Bank of the Chesapeake’s future growth and management’s outlook or expectations for revenue, assets, asset quality, profitability, business prospects, net interest margin, non-interest revenue, allowance for loan losses, the level of credit losses from lending, liquidity levels, capital levels, or other future financial or business performance strategies or expectations, and any statements of the plans and objectives of management for future operations products or services, including the expected benefits from, and/or the execution of integration plans relating to the County First acquisition; plans regarding branch closings or consolidation; any statement of expectation or belief; projections related to certain financial metrics; and any statement of assumptions underlying the foregoing. These forward-looking statements express management’s current expectations or forecasts of future events, results and conditions, and by their nature are subject to and involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein.  Factors that might cause actual results to differ materially from those made in such statements include, but are not limited to: the synergies and other expected financial benefits from County First acquisition may not be realized within the expected time frames; costs or difficulties related to integration matters might be greater than expected; general economic trends; changes in interest rates; loss of deposits and loan demand to other financial institutions; substantial changes in financial markets; changes in real estate value and the real estate market; regulatory changes; the possibility of unforeseen events affecting the industry generally; the uncertainties associated with newly developed or acquired operations; the outcome of litigation that may arise; market disruptions and other effects of terrorist activities; and the matters described in “Item 1A Risk Factors” in the Company’s Annual Report on Form 10-K for the Year Ended December 31, 2017, and in its other Reports filed with the Securities and Exchange Commission (the “SEC”). The Company’s forward-looking statements may also be subject to other risks and uncertainties, including those that it may discuss elsewhere in this news release or in its filings with the SEC, accessible on the SEC’s Web site at www.sec.gov. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required under the rules and regulations of the SEC.

Data is unaudited as of March 31, 2018. This selected information should be read in conjunction with the financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

CONTACTS: 
William J. Pasenelli, Chief Executive Officer
Todd L. Capitani, Chief Financial Officer
888.745.2265