The Community Financial Corporation Reports a 46%

WALDORF, Md., July 18, 2017 (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 second quarter and six months ended June 30, 2017. Net income was $2.5 million for the three months ended June 30, 2017, an increase of $805,000 or 46.3%, compared to $1.7 million for the three months ended June 30, 2016. Earnings per common share (diluted) at $0.55 increased $0.17 from $0.38 per common share (diluted) for the three months ended June 30, 2016.  The Company’s returns on average assets and common stockholders’ equity for the second quarter of 2017 were 0.74% and 9.36%, respectively, compared to 0.57% and 6.79%, respectively, for the second quarter of 2016.    

Net income was $4.9 million for the six months ended June 30, 2017, an increase of $1.6 million or 46.0%, compared to $3.3 million for the six months ended June 30, 2016. Earnings per common share (diluted) for the first six months of 2017 were $1.05 increasing $0.33 from $0.72 per common share (diluted) for the six months ended June 30, 2016. The Company’s returns on average assets and common stockholders’ equity, for the six months ended June 30, 2017 were 0.72% and 9.07%, respectively, compared to 0.57% and 6.58%, respectively, for first six months of 2016. 

The Company continued to improve quarterly results, recording its seventh consecutive quarter of earnings growth. Net income of $2.5 million for the three months ended June 30, 2017 increased $201,000 compared to $2.3 million of net income for the first quarter of 2017. Earnings per common share (diluted) at $0.55 increased $0.04 from $0.51 per common share (diluted) for the three months ended March 31, 2017.  The Company’s returns on average assets and common stockholders’ equity for the second quarter of 2017 were 0.74% and 9.36%, respectively, compared to 0.70% and 8.78%, respectively, for the first quarter of 2017.  The increase in net income from the first quarter was the result of increased net interest income and noninterest income of $259,000 and 177,000, respectively, partially offset by increased noninterest expense of $151,000 and higher income tax expense due to higher pretax earnings. The Company’s loan portfolio increased to $1,142.0 million at June 30, 2017, an increase of $28.3 million or 10.2% annualized, compared to first quarter ending loan balances of $1,113.7 million.   

“I am pleased that The Community Financial Corporation’s management team continues to execute the Company’s strategic plan. Two years of interest-earning asset growth, expense control and improving asset quality should position the Company to further increase operating leverage during 2017,” stated Michael L. Middleton, Chairman of the Board.

“Loans have grown $53.0 million or 9.7% annualized to $1,142.0 million at June 30, 2017 since the end of 2016. We are on pace to grow 8% to 10% in 2017,” stated William J. Pasenelli, Chief Executive Officer and Vice-Chairman of the Board.  “Our loan growth increased top-line revenue and has been a major factor in improving profitability. I am equally satisfied with our accomplishments in improving credit quality and controlling expense growth. Non-accrual loans and other real estate owned (“OREO”) as a percentage of assets have declined every quarter since the fourth quarter of 2015, decreasing from 1.83% of assets to 0.98% at June 30, 2017. During the same timeframe, the Company’s efficiency ratio ¹  improved 11 percentage points to 63% for the second quarter of 2017 from 74% for the three months ended December 31, 2015.”

The Company previously announced the closing of its Central Park Fredericksburg branch. The branch is expected to close in the third quarter. This location will continue to serve as a loan production office and the branch closure will not have a material effect on operations.

“Changing customer banking preferences, along with the opening of our downtown Fredericksburg branch, precipitated the decision to close the Central Park branch,” stated James F. Di Misa, Chief Operating Officer and Executive Vice President. “Current branch employees will fill open positions.” 

Net interest margin for the three months ended June 30, 2017 was stable compared to the first quarter of 2017, decreasing one basis point from 3.40% to 3.39%, respectively. The decrease was expected and attributable to a slightly faster rise in the Company’s cost of funds compared to increased yields for loans and investments. The increase in cost of funds to 0.79% for the three months ended June 30, 2017 from 0.74% for the first quarter 2017 was primarily due to rising short-term wholesale funding rates during the first six months of 2017.  Overall loan and investment yields increased during the second quarter from 4.12% during the first quarter of 2017 to 4.16% for the three months ended June 30, 2017.  The increase in interest-earning yields was due to larger dollar growth in the commercial real estate portfolio compared to the residential first mortgage portfolio, the scheduled repricing of loans and the purchase of securities and the production of commercial real estate loans in a rising rate environment.

Net Interest Income

Net interest income increased 10.5% or $1.0 million to $10.9 million for the three months ended June 30, 2017 compared to $9.9 million for the three months ended June 30, 2016. Net interest margin at 3.39% for the three months ended June 30, 2017 decreased 13 basis points from 3.52% for the three months ended June 30, 2016. Average interest-earning assets were $1,288.2 million for the second quarter of 2017, an increase of $164.6 million or 14.6%, compared to $1,123.6 million for the same quarter of 2016.

Net interest income increased 12.0% or $2.3 million to $21.6 million for the six months ended June 30, 2017 compared to $19.3 million for the six months ended June 30, 2016. Net interest margin at 3.40% for the six months ended June 30, 2017 decreased 11 basis points from 3.51% for the six months ended June 30, 2016. Average interest-earning assets were $1,271.5 million for the first six months of 2017, an increase of $172.8 million or 15.7%, compared to $1,098.7 million for the first six months of 2016.

Net interest margin declined during the first half of 2017, primarily due to reduced yields on loans and a slight increase in cost of funds. Yields on the loan portfolio decreased from 4.61% for the six months ended June 30, 2016 to 4.44% for six months ended June 30, 2017. Yields were reduced compared to the prior year due to the Bank’s increased investment in residential mortgages during 2016 and the low intermediate term interest rates that were depressed for most of 2016. The ten year U.S. Treasury rate was as low as 1.37% (July 8, 2016).

During the second quarter of 2017, loan yields began to rise compared to the first quarter of 2017, influenced by increases in the federal funds target rate (1.25% as of June 15, 2017) and loan growth in higher yielding portfolios. The Company plans to continue to slow the growth of residential first mortgages in favor of increasing commercial loan growth for the balance of the year.  

A small increase in the cost of funds slightly impacted net interest margin for the comparable periods. The cost of funds increased two basis points to 0.76% for the six months ended June 30, 2017 compared to 0.74% for the six months ended June 30, 2016. The Company continued to make progress in controlling deposit costs by increasing transaction deposits as a percentage of overall deposits. Average transaction deposits, which include savings, money market, interest-bearing demand and noninterest bearing demand accounts, for the six months ended June 30, 2017 increased $71.2 million, or 13.2%, to $612.4 million compared to $541.2 million for the comparable period in 2016. Average transaction accounts as a percentage of total deposits increased from 57.2% for the six months ended June 30, 2016 to 58.1% for the six months ended June 30, 2017.

Wholesale and time based funding rates are typically more sensitive to rising interest rates than transactional deposits. Compared to the three months ended June 30, 2016, interest rates for the second quarter of 2017 increased by nine basis points on certificates of deposit, while interest-bearing transactional deposits increased by two basis points. The Company’s Federal Home Loan Bank (“FHLB”) short-term borrowings and guaranteed preferred beneficial interest in junior subordinated debentures (“TRUPS’), increased by 59 basis points and 47 basis points, respectively, for the comparable periods. The Company’s ability to increase transaction deposits faster than wholesale funding during 2017 could mitigate possible downward pressure on net interest margin that has occurred during the first half of 2017.   

Noninterest Income and Noninterest Expense

Noninterest income increased by $275,000 to $1.1 million for the three months ended June 30, 2017 compared to $777,000 for the three months ended June 30, 2016. Noninterest income increased by $300,000 to $1.9 million for the six months June 30, 2017 compared to $1.6 million for the six months June 30, 2016. The increase in income for the three and six months was due to OREO losses recognized in 2016 not recognized in 2017 and an increase in securities gains partially offset by a reduction in service charge income.  

Noninterest expense averaged just below $7.3 million per quarter during 2016. The Company focused during the prior year on controlling the growth of expenses by streamlining internal processes and reviewing vendor relationships. These efforts resulted in a reduction in nine FTEs, from 171 employees to 162 employees, during the year ended December 31, 2016. The Company’s strategy to create operating leverage through continued asset growth combined with controlling the growth in expenses will continue during 2017.

For the three months ended June 30, 2017, noninterest expense increased 3.3%, or $238,000, to $7.5 million from $7.3 million for the comparable period in 2016. The Company’s efficiency ratio for the three months ended June 30, 2017 and 2016 was 62.83% and 68.33%, respectively. The Company’s net operating expense ratio ²  as a percentage of average assets for the three months ended June 30, 2017 and 2016 was 1.89% and 2.15%, respectively. These ratios have improved in each successive quarter since the three months ended December 31, 2015.  The following is a summary breakdown of noninterest expense:

For the six months ended June 30, 2017, noninterest expense increased 2.6%, or $377,000, to $14.9 million from $14.5 million for the comparable period in 2016. The first six months of 2017 the Company controlled growth in compensation and benefits expense at 1.9%. Total growth in compensation and benefit costs was 2.7% and 3.2%, respectively for the years ended December 31, 2016 and 2015.  The Company’s efficiency ratio for the six months ended June 30, 2017 and 2016 was 63.35% and 69.48%, respectively. The Company’s net operating expense ratio as a percentage of average assets for the six months ended June 30, 2017 and 2016 was 1.91% and 2.18%, respectively. The following is a summary breakdown of noninterest expense:

Balance Sheet and Asset Quality

Balance Sheet

Total assets at June 30, 2017 were $1.39 billion, an increase of $58.4 million or 8.8% annualized growth, compared to total assets of $1.33 billion at December 31, 2016. The increase in total assets was primarily attributable to growth in loans. Net loans increased $52.9 million, or 9.8% annualized growth, from $1,079.5 million at December 31, 2016 to $1,132.4 million at June 30, 2017, principally due to increases in loans secured by commercial real estate and residential first mortgages.

The following is a breakdown of the Company’s loan portfolio at June 30, 2017 and December 31, 2016:

Deposits increased by 9.4% annualized, or $49.0 million, to $1,087.8 million at June 30, 2017 compared to $1,038.8 million at December 31, 2016.  The Company uses both traditional and reciprocal brokered deposits. Traditional brokered deposits at June 30, 2017 and December 31, 2016 were $146.9 million and $131.0 million, respectively. Reciprocal brokered deposits are used to maximize FDIC insurance available to our customers. Reciprocal brokered deposits at June 30, 2017 and December 31, 2016 were $95.6 million and $70.7 million, respectively. The following is a breakdown of the Company’s deposit portfolio at June 30, 2017 and December 31, 2016:

FHLB long-term debt and short-term borrowings increased $9.5 million from $144.6 million at December 31, 2016 to $154.1 million at June 30, 2017. 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.

During the six months ended June 30, 2017, stockholders’ equity increased $4.9 million to $109.3 million. The increase in stockholders’ equity was due to net income of $4.9 million, a current year decrease in accumulated other comprehensive loss of $439,000 and net stock related activities related to stock-based compensation of $444,000. These increases to capital were partially offset by quarterly common dividends paid of $901,000. Common stockholders' equity of $109.3 million at June 30, 2017 resulted in a book value of $23.51 per common share compared to $22.54 at December 31, 2016. The Company remains well-capitalized at June 30, 2017 with a Tier 1 capital to average assets ratio of 8.85%.

Asset Quality

The Company continues to pursue its approach of maximizing contractual rights with individual classified customer relationships. The objective is to move non-performing or substandard credits that are not likely to become performing or passing credits in a reasonable timeframe off the balance sheet. The Company is encouraging existing customers with classified credits to obtain financing with other lenders or enforcing its contractual rights. Management believes this strategy is in the best long-term interest of the Company. As a result of these efforts, non-accrual loans and OREO to total assets have decreased from 1.83% at December 31, 2015, to 1.21% at December 31, 2016, and to 0.98% at June 30, 2017.  Non-accrual loans, OREO and TDRs to total assets decreased from 2.98% at December 31, 2015, to 1.99%, at December 31, 2016, and to 1.71% at June 30, 2017.

Management considers classified assets to be an important measure of asset quality. Classified assets have been trending downward the last several years. The following is a breakdown of the Company’s classified and special mention assets at June 30, 2017, March 31, 2017 and December 31, 2016, 2015, 2014 and 2013, respectively:

The allowance for loan losses was 0.91% of gross loans at June 30, 2017 and December 31, 2016. 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 reductions in classified assets and delinquency, were offset by increases in other qualitative factors, such as concentration to capital factors. The specific allowance is based on management’s estimate of realizable value for particular loans. Management believes that the allowance is adequate.

The following is a breakdown of the Company’s general and specific allowances as a percentage of gross loans at June 30, 2017 and December 31, 2016, respectively:

The historical loss experience factor is tracked over various time horizons for each portfolio segment. The following table provides net charge-offs as a percentage of average loans for the three and six months ended June 30, 2017 and 2016, respectively, and a five-year trend:

About The Community Financial Corporation - The Company is the bank holding company for Community Bank of the Chesapeake. Headquartered in Waldorf, Maryland, Community Bank of the Chesapeake is a full-service commercial bank, with assets over $1.3 billion.  Through its 12 branches and five commercial lending centers, Community Bank of the Chesapeake offers a broad range of financial products and services to individuals and businesses. The Company’s branches are located at its main office in Waldorf, Maryland, and 11 branch offices in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby and California, Maryland; and Central Park and downtown Fredericksburg, Virginia.

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 involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein. These risks and uncertainties involve 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, 2016. 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 Securities and Exchange Commission.

Data is unaudited as of June 30, 2017. 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, 2016.

^{__________________ 1}   Efficiency Ratio - noninterest expense divided by the sum of net interest income and noninterest income.

²   Net Operating Expense Ratio - noninterest expense less noninterest income divided by average assets.

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