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The Community Financial Corporation Reports Operating Results for the Three and Six Months Ended June 30, 2019

WALDORF, Md., July 24, 2019 (GLOBE NEWSWIRE) -- The Community Financial Corporation (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, 2019.

The Company reported net income for the three months ended June 30, 2019 (“2019Q2”) of $3.6 million or diluted earnings per share of $0.65 compared to a net income for the second quarter of 2018 (“2018Q2”) of $2.3 million or a diluted earnings per share of $0.42. The 2018Q2 results included merger and acquisition costs net of tax of $546,000. Merger and acquisition costs did not impact earnings per share for 2019Q2. The Company’s return on average assets (“ROAA”) and return on average common equity (“ROACE”) were 0.84% and 8.99% in 2019Q2 compared to 0.59% and 6.34% in 2018Q2. For the three months ended March 31, 2019 (“2019Q1”), net income, diluted earnings per share, ROAA and ROACE were $3.9 million, $0.70, 0.91% and 9.85%, respectively.

Net income for the six months ended June 30, 2019 (“2019YTDQ2”) was $7.5 million or $1.35 per diluted share compared to net income of $3.6 million or $0.64 per diluted share for the six months ended June 30, 2018 (“2018YTDQ2”). The first six months results in 2018 included merger and acquisition costs net of tax of $2.7 million. Merger and acquisition costs did not impact earnings per share in 2019YTDQ2. The impact of merger and acquisition costs resulted in a reduction to 2018YTDQ2 earnings per share of approximately $0.48. The Company’s ROAA and ROACE were 0.88% and 9.41% in 2019YTDQ2 compared to 0.45% and 4.84% in 2018YTDQ2.

The Company completed the acquisition of County First Bank (“County First”) on January 1, 2018, increasing the Company’s asset size by $200 million to just under $1.6 billion.  As of December 31, 2018 (“at 2018Q4”), the Company’s assets were just under $1.7 billion. The Company closed four of the five acquired County First branches during May of 2018. The La Plata downtown branch remains open. County First closed its Fairfax, Virginia loan production office prior to the legal merger. The first six months of 2018 included operating expenses to support the merged operations with County First Bank. The closure of four branches and reductions in headcount during the second quarter of 2018 positively impacted the Company’s operating expense run rate in the second half of 2018.

Management Commentary

During the six months ended June 30, 2019, the Bank stabilized net interest margin, controlled expenses, continued to organically grow loans and improved credit quality.

In the second quarter of 2019, net interest margin was stable increasing slightly from 3.31% in 2019Q1 to 3.33% in 2019Q2. An inverted yield curve as well as strong competition, contributed to net interest margin contraction in the second half of 2018 and the first quarter of 2019. Projected loan growth for 2019 ranges between 5%-7%.  We continue to evaluate loan opportunities in light of marginal and total funding costs. Net interest margins should be positively impacted if Federal Reserve rate cuts steepen the yield curve.

The Company improved on-balance sheet liquidity over the last 18 months. Our loan to deposit ratio decreased from 103.1% at December 31, 2017 to 92.2% at June 30, 2019 (“at 2019Q2”). At the same time, wholesale funding, which includes brokered deposits and Federal Home Loan Bank advances, decreased from $262.9 million or 18.6% of assets at December 31, 2017 to $80.4 million or 4.6% of assets at June 30, 2019. Increased liquidity provides more opportunities to lower our funding costs over time.

We are pleased with progress in decreasing nonperforming assets in 2019. Although, OREO expenses were slightly elevated in the second quarter, overall nonperforming assets have decreased $8.3 million from $34.1 million at December 31, 2018 to $25.8 million at June 30, 2019. Non-accrual loans, OREO and TDRs to total assets decreased 55 basis points to 1.47% at June 30, 2019 compared to 2.02% at December 31, 2018.  The second quarter OREO expense was related to an offer of $1.8 million to buy a commercial building and is expected to settle in the third or fourth quarter of this year.  

Management remains committed to controlling expenses. In the second quarter of 2019, the efficiency ratio and net operating expense to average assets were 62.9% and 1.83%, respectively. These ratios were impacted by the higher than anticipated OREO charges, and if adjusted for this activity were 60.1% and 1.74%, respectively (See Non-GAAP reconciliation schedules).

The Company has successfully integrated the County First acquisition into its existing franchise. The Company has returned to organic growth between 6%-7%. We believe current market disruptions will provide opportunities for continued organic growth.

Highlights at and for the three and six months ended June 30, 2019 include:

  • Net interest margin increased two basis points from 3.31% in 2019Q1 to 3.33% in 2019Q2. Net interest income increased $222,000 from $13.0 million in 2019Q1 compared to $13.3 million in 2019Q2. Accretion interest and nonaccrual interest impacted (increased) net interest margin by four basis points and five basis points in 2019Q1 and 2019Q2, respectively. 2019Q2 loan yields and overall interest-earning asset yields increased three basis points to 2019Q1 to 4.83% and 4.54%, respectively, compared to 2019Q1. The Bank’s cost of funds increased two basis points to 1.27% for the comparable periods.
     
  • Nonperforming assets continued to improve in the second quarter of 2019. Non-accrual loans, OREO and TDRs to total assets decreased 55 basis points to 1.47% at June 30, 2019 compared to 2.02% at December 31, 2018.  Classified assets as a percentage of assets decreased 32 basis points to 2.10% at June 30, 2019 from 2.42% at December 31, 2018.
     
  • During the second quarter, gross loans increased 7.0% annualized or $24.0 million from $1,363.2 million at March 31, 2019 (“at 2019Q1”) to $1,387.2 million at 2019Q2. Year to date gross loans increased 6.0% annualized or $40.3 million from $1,346.9 million at 2018Q4 to $1,387.2 million at 2019Q2.
     
  • The Company’s average contractual interest rates for loans continued to increase. Loan yields on repricing and new loans increased during 2018 and continued during the second quarter of 2019, influenced by increases in the federal funds target rate and loan growth in higher yielding portfolios. End of period projected loan yields have increased since the third quarter of 2017. The following table is based on contractual interest rates and does not include the amortization of deferred costs and fees or assumptions regarding non-accrual interest: 
   
Weighted End of Period Contractual Interest Rates
 
 
    June 30, 2019   March 31, 2019   December 31, 2018   September 30, 2018   June 30, 2018  
(dollars in thousands)   EOP Contractual
Interest rate
  EOP Contractual
Interest rate
  EOP Contractual
Interest rate
  EOP Contractual
Interest rate
  EOP Contractual
Interest rate
 
                       
Commercial real estate   4.66 %   4.63 %   4.61 %   4.56 %   4.55 %  
Residential first mortgages   3.95 %   3.94 %   3.93 %   3.90 %   3.91 %  
Residential rentals   4.84 %   4.79 %   4.77 %   4.75 %   4.76 %  
Construction and land development   5.45 %   5.41 %   5.32 %   5.13 %   5.22 %  
Home equity and second mortgages   5.62 %   5.62 %   5.39 %   5.14 %   5.14 %  
Commercial loans   5.89 %   5.91 %   5.76 %   5.59 %   5.53 %  
Consumer loans   6.60 %   6.88 %   6.93 %   6.91 %   6.83 %  
Commercial equipment    4.60 %   4.54 %   4.52 %   4.47 %   4.47 %  
Total Loans   4.70 %   4.68 %   4.64 %   4.57 %   4.56 %  
                                 
  • Total deposits increased $64.8 million or 4.53% to $1,494.4 million at 2019Q2 compared to 2018Q4. Non-interest bearing demand deposits have increased $17.3 million or 8.3% to $226.7 million at 2019Q2 compared to $209.4 million at 2018Q4.

    The Bank typically experiences transaction deposit volatility during the first quarter as our business customers use transaction account balances to pay expenses and taxes accrued in the prior year.  Transaction accounts decreased $13.3 million in first quarter of 2019 while time deposits increased $22.8 million. During the second quarter of 2019, transaction accounts increased $64.5 million while time deposits decreased $9.2 million.

  • Net income in 2019Q2 decreased $250,000 to $3.6 million, or $0.65 per share, compared to $3.9 million, or $0.70 per share, in the prior quarter. The Company’s ROAA and ROACE were 0.84% and 8.99% in 2019Q2 compared to 0.91% and 9.85% in the prior quarter. The Company had no material adjustments to operating net income1 in 2019Q2 and 2019Q1 and operating earnings per share, operating ROAA and operating ROACE were the same. The slight decrease in earnings was primarily the result of increased noninterest expense for OREO valuation allowances to adjust values to a ratified contract and elevated professional fees related to strategic projects that are not expected to impact the Company’s average run rate in future quarters. These decreases to earnings were partially offset by increased net interest income, a lower loan loss provision and increased noninterest income. The Company’s quarterly expense run rate is expected to range between $8.6 and $8.8 million for the remaining quarters of 2019. 
   
  THE COMMUNITY FINANCIAL CORPORATION  
    Three Months Ended        
dollars in thousands   June 30, 2019   March 31, 2019   $ Variance   % Variance  
Operations Data:                  
Interest and dividend income   $   18,118   $   17,797   $   321     1.8 %  
Interest expense       4,859       4,760       99     2.1 %  
Net interest income       13,259       13,037       222     1.7 %  
Provision for loan losses       375       500       (125 )   (25.0 %)  
Noninterest income       1,253       1,061       192     18.1 %  
Noninterest expense       9,116       8,405       711     8.5 %  
Income before income taxes       5,021       5,193       (172 )   (3.3 %)  
Income tax expense       1,394       1,316       78     5.9 %  
Net income   $   3,627   $   3,877   $   (250 )   (6.4 %)  
                   
  • Operating net income increased $746,000 or 25.9% to $3.6 million in 2019Q2 compared to $2.9 million in 2018Q2. The Company’s operating ROAA and operating ROACE were 0.84% and 8.99% in 2019Q2 compared to 0.73% and 7.82% in 2018Q2. Operating diluted earnings per share were $0.65 and $0.52, respectively, for the comparable periods.

    Operating net income increased $1.3 million or 20.3% to $7.5 million in 2019YTDQ2 compared to $6.2 million in 2018YTDQ2. The Company’s operating ROAA and operating ROACE were 0.88% and 9.41% in 2019YTDQ2 compared to 0.79% and 8.49% in 2018YTDQ2. Operating diluted earnings per share were $1.35 and $1.12, respectively, for the comparable periods.

    Improved earnings were the result of a change in the funding composition of the Bank’s interest-bearing liabilities, the control of operating costs, and organic loan growth partially offset by decreasing margins.
  • Noninterest expense of $9.1 million in 2019Q2 increased $711,000 compared to $8.4 million in the prior quarter, primarily due to   higher OREO expenses and professional fees related to strategic projects. Salaries and benefits are expected to increase between two and four percent in 2019 compared to 2018. The higher range is based on Company meeting incentive plan targets. We believe the Company’s quarterly expense run rate will range between $8.6 and $8.8 million for the remaining quarters of 2019. The following is a summary breakdown of noninterest expenses comparing 2019Q2 and 2019Q1: 
                   
    Three Months Ended          
(dollars in thousands)   June 30, 2019   March 31, 2019   $ Change      % Change   
Salary and employee benefits   $   4,881   $   4,803   $   78     1.6 %  
OREO Valuation Allowance and Expenses       432       56       376     671.4 %  
Operating Expenses       3,803       3,546       257     7.2 %  
Total Noninterest Expense   $   9,116   $   8,405   $   711     8.5 %  
  • The GAAP efficiency ratio was 62.82% in 2019Q2 compared to 59.62% in 2019Q1. The non-GAAP (or “operating”) efficiency ratio2, which excludes merger and acquisition costs, OREO gains and losses and other non-core activities, was 60.11% in 2019Q2 compared to 59.46% in 2019Q1.

Net Income

The Company reported net income for 2019Q2 of $3.6 million or diluted earnings per share of $0.65 compared to a net income of $2.3 million or $0.42 per diluted share for 2018Q2. There were no merger and acquisition costs in 2019Q2 and no impact to earnings per share. The 2018Q2 results included merger and acquisition costs net of tax of $546,000, resulting in a $0.10 decline in earnings per share. The Company’s ROAA and ROACE were 0.84% and 8.99% in 2019Q2 compared to 0.59% and 6.34% in 2018Q2.

Net income in 2019YTDQ2 was $7.5 million or $1.35 per diluted share compared to net income of $3.6 million or $0.64 per diluted share in 2018YTDQ2. There were no merger and acquisition costs in 2019YTDQ2 and no impact to earnings per share. The first six months of 2018 results included merger and acquisition costs net of tax of $2.7 million, resulting in a $0.48 decline to earnings per share. The Company’s ROAA and ROACE were 0.88% and 9.41% in 2019YTDQ2 compared to 0.45% and 4.84% in 2018YTDQ2.

The $3.9 million increase to net income in 2019YTDQ2 compared to 2018YTDQ2 was primarily due to decreased noninterest expense of $3.9 million, of which $3.6 million related to merger and acquisition costs incurred during 2018YTDQ2. In addition, the Company’s 2019YTDQ2 expense run rate was $286,000 lower than 2018YTDQ2 for all other noninterest expenses. The Company began to realize cost savings from the County First acquisition in the second half of 2018 with the closing of four branches and an operations center, an overall reduction in headcount and the elimination of duplicate processes and vendors. In addition, net interest income and noninterest income increased $995,000 and $382,000, respectively comparing 2019YTDQ2 to 2018YTDQ2. Partially offsetting the improvements to pre-tax income was increased income tax expense of $1.3 million for 2019YTDQ2 compared to 2018YTDQ2.

Net Interest Income

Net interest income increased 6.8% or $848,000 to $13.3 million in 2019Q2 compared to $12.4 million in 2018Q2. Net interest margin at 3.33% in 2019Q2 decreased eight basis points from 3.41% in 2018Q2. Average interest-earning assets were $1,594.6 million for the second quarter of 2019, an increase of $136.9 million or 9.4%, compared to $1,457.7 million for the same quarter of 2018. Accretion interest and nonaccrual interest increased net interest margin by five basis points and one basis point in 2019Q2 and 2018Q2, respectively. The below table provides information on the impact of changes in volume and rate for the three months ended June 30, 2019 and 2018: 

Three Months Ended June 30, 2019 compared to June 30, 2018       Due to      
dollars in thousands   Volume       Rate       Total  
           
Loan portfolio (1) $   1,059     $   824     $   1,883  
Investment securities, federal funds sold and interest bearing deposits     360         121         481  
Total interest-earning assets $   1,419     $   945     $   2,364  
           
Savings     (1 )       6         5  
Interest-bearing demand and money market accounts     321         538         859  
Certificates of deposit     65         632         697  
Long-term debt      (127 )       49         (78 )
Short-term debt     (74 )       92         18  
Subordinated notes     -         -         -  
TRUPs     -         15         15  
Total interest-bearing liabilities  $   184     $   1,332     $   1,516  
Net change in net interest income $   1,235     $   (387 )   $   848  
           
(1) Average balance includes non-accrual loans 

Net interest income increased 3.9% or $995,000 to $26.3 million in 2019YTDQ2 compared to $25.3 million in 2018YTDQ2. Net interest margin at 3.32% in 2019YTDQ2 decreased 15 basis points from 3.47% in 2018YTDQ2. Average interest-earning assets were $1,585.9 million for the first six months of 2019, an increase of $128.6 million or 8.9%, compared to $1,457.3 million for the same period of 2018. The below table provides information on the impact of changes in volume and rate for the six months ended June 30, 2019 and 2018:

Six Months Ended June 30, 2019 compared to June 30, 2018       Due to      
dollars in thousands   Volume       Rate       Total  
           
Loan portfolio (1) $   1,914     $   1,372     $   3,286  
Investment securities, federal funds sold and interest bearing deposits     710         272         982  
Total interest-earning assets $   2,624     $   1,644     $   4,268  
           
Savings     (2 )       12         10  
Interest-bearing demand and money market accounts     778         1,243         2,021  
Certificates of deposit     (27 )       1,369         1,342  
Long-term debt      (341 )       124         (217 )
Short-term debt     (228 )       297         69  
Subordinated notes     -         -         -  
TRUPs     -         48         48  
Total interest-bearing liabilities  $   180     $   3,093     $   3,273  
Net change in net interest income $   2,444     $   (1,449 )   $   995  
           
(1) Average balance includes non-accrual loans 

Noninterest Income and Noninterest Expense

Noninterest income at $1.3 million in 2019Q2 increased $352,000 compared to 2018Q2. The increase was primarily due to increased miscellaneous fees and service charges of $212,000 and unrealized gains of $65,000 on equity securities in 2019Q2 compared to unrealized losses of $78,000 on equity securities in 2018Q2. Noninterest income at $2.3 million in 2019YTDQ2 increased $382,000 compared to 2018YTDQ2. The increase was primarily due to increased miscellaneous fees and service charges of $195,000 and unrealized gains of $121,000 on equity securities in 2019YTDQ2 compared to unrealized losses of $78,000 on equity securities in 2018YTDQ2.  

Noninterest expense decreased $633,000 or 6.5%, to $9.1 million in 2019Q2 compared to $9.7 million in 2018Q2, of which $741,000 of the variance was due to merger and acquisition costs incurred during 2018Q2. The Company’s 2019 expense run rate has been positively impacted by the increased efficiencies from the County First acquisition and management’s continued focus on containing expense growth. The Company’s quarterly expense run rate is expected to range between $8.6 and $8.8 million for remaining quarters of 2019. The second quarter 2019 increase above $8.8 million run rate was primarily due to OREO valuation allowances to adjust values to a ratified contract and elevated professional fees related to strategic projects that are not expected to impact the Company’s average run rate in future quarters. Adjusted noninterest expense, which excludes merger-related expenses and OREO related expenses decreased $87,000, or 1.0%, to $8.7 million in 2019Q2 compared to $8.8 million in 2018Q2.

The Company’s GAAP efficiency ratio was 62.82% in 2019Q2 compared to 73.23% in 2018Q2. The operating efficiency ratio, which excludes merger and acquisition costs, OREO gains and losses and other non-core activities, was 60.11% and 65.51% for the same periods. The Company’s GAAP net operating expense ratio was 1.83% in 2019Q2 compared to 2.24% in 2018Q2. 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 1.74% and 1.97% for the same periods. The following is a summary of noninterest expense: 

    Three Months Ended June 30,          
(dollars in thousands)     2019     2018     $ Change     % Change    
Salary and employee benefits   $   4,881   $   5,129       (248 )   (4.8 %)  
OREO Valuation Allowance and Expenses       432       237       195     82.3 %  
Merger and acquisition costs       -       741       (741 )   (100.0 %)  
Operating Expenses       3,803       3,642       161     4.4 %  
Total Noninterest Expense   $   9,116   $   9,749   $   (633 )   (6.5 %)  

Noninterest expense decreased $3.9 million or 18.2%, to $17.5 million in 2019YTDQ2 compared to $21.4 million in 2018YTDQ2, of which $3.6 million of the variance was due to merger and acquisition costs incurred during 2018YTDQ2. The Company’s 2019 expense run rate has been positively impacted by the increased efficiencies from the County First acquisition and management’s continued focus on containing expense growth. As previously explained second quarter elevated expenses for OREO valuation allowances and professional fees are not expected to impact the Company’s average run rate in future quarters. Adjusted noninterest expense, which excludes merger-related expenses and OREO related expenses decreased $423,000, or 2.4%, to $17.0 million in 2019YTDQ2 compared to $17.5 million in 2018YTDQ2. Overall the decreases in adjusted noninterest expenses comparing 2019YTDQ2 to 2018YTDQ2 were due primarily to decreases in salary and employee benefits of $492,000 and other operating expenses of $177,000 related to the reduction of County First employee head count in the second half of 2018. These decreases to expenses were partially offset by increased professional fees of $246,000.

The Company’s GAAP efficiency ratio was 61.24% in 2019YTDQ2 compared to 78.64% in 2018YTDQ2. The operating efficiency ratio was 59.79% and 63.92% for the same periods. The Company’s GAAP net operating expense ratio was 1.78% in 2019YTDQ2 compared to 2.47% in 2018YTDQ2. 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 1.74% and 1.95% for the same periods. The following is a summary breakdown of noninterest expense:

    Six Months Ended June 30,          
(dollars in thousands)     2019     2018     $ Change     % Change    
Salary and employee benefits   $   9,684   $   10,176   $   (492 )   (4.8 %)  
OREO Valuation Allowance and Expenses       488       351       137     39.0 %  
Merger and acquisition costs       -       3,609       (3,609 )   (100.0 %)  
Operating Expenses       7,349       7,280       69     0.9 %  
Total Noninterest Expense   $   17,521   $   21,416   $   (3,895 )   (18.2 %)  

Balance Sheet
Total assets increased $67.2 million, or 4.0%, to $1.76 billion at 2019Q2 compared to total assets of $1.69 billion at 2018Q4 primarily due to increases in net loans of $40.5 million. In addition total assets increased $9.2 million for investments, $5.3 million for cash,  $2.2 million for OREO and $9.7 million in right of use assets for operating leases recorded in accordance with the new lease standard which was effective for the Company on January 1, 2019. All other assets increased $272,000.  The Company’s loan pipeline was approximately $112.0 million at June 30, 2019. The following tables breakdown of growth for 2019Q2 and 2019YTDQ2 by portfolio:  

                      Annualized
   
BY LOAN TYPE   June 30, 2019   %   March 31, 2019   %   $ Change % Change    
                           
Commercial real estate   $   917,948   66.18 %   $   891,165   65.37 %   $   26,783   12.02 %    
Residential first mortgages       156,670   11.29 %       156,653   11.49 %       17   0.04 %    
Residential rentals       121,990   8.79 %       124,518   9.13 %       (2,528 ) -8.12 %    
Construction and land development       35,662   2.57 %       32,798   2.41 %       2,864   34.93 %    
Home equity and second mortgages       35,866   2.59 %       36,746   2.70 %       (880 ) -9.58 %    
Commercial loans       67,617   4.87 %       70,725   5.19 %       (3,108 ) -17.58 %    
Consumer loans       967   0.07 %       851   0.06 %       116   54.52 %    
Commercial equipment        50,466   3.64 %       49,720   3.65 %       746   6.00 %    
Gross loans       1,387,186   100.00 %       1,363,176   100.00 %       24,010   7.05 %    
Net deferred costs (fees)       1,363   0.10 %       1,261   0.09 %       102   32.36 %    
Total loans, net of deferred costs   $   1,388,549       $   1,364,437       $   24,112   7.07 %    
                           
                           
                      Annualized
   
BY LOAN TYPE   June 30, 2019   %   December 31, 2018   %   $ Change % Change    
                           
Commercial real estate   $   917,948   66.18 %   $   878,016   65.18 %   $   39,932   9.10 %    
Residential first mortgages       156,670   11.29 %       156,709   11.63 %       (39 ) -0.05 %    
Residential rentals       121,990   8.79 %       124,298   9.23 %       (2,308 ) -3.71 %    
Construction and land development       35,662   2.57 %       29,705   2.21 %       5,957   40.11 %    
Home equity and second mortgages       35,866   2.59 %       35,561   2.64 %       305   1.72 %    
Commercial loans       67,617   4.87 %       71,680   5.32 %       (4,063 ) -11.34 %    
Consumer loans       967   0.07 %       751   0.06 %       216   57.52 %    
Commercial equipment        50,466   3.64 %       50,202   3.73 %       264   1.05 %    
Gross loans       1,387,186   100.00 %       1,346,922   100.00 %       40,264   5.98 %    
Net deferred costs (fees)       1,363   0.10 %       1,183   0.09 %       180   30.43 %    
Total loans, net of deferred costs   $   1,388,549       $   1,348,105       $   40,444   6.00 %    

The acquisition of County First and 2018 organic loan growth changed the composition of the loan portfolios during 2018.  The growth in the commercial real estate portfolio should increase asset sensitivity over time’ Commercial real estate increased from 63.25% of gross loans at 2017Q4 to 66.18% at 2019Q2. The relative decrease in residential first mortgage balances should also increase asset interest rate sensitivity. Regulatory concentrations for non-owner occupied commercial real estate and construction at 2019Q2 were $602 million or 312% and $140 million or 72%, respectively. Acquired and non-acquired loans consist at June 30, 2019 and December 31, 2018 were as follows:

                 
BY ACQUIRED AND NON-ACQUIRED   June 30, 2019   %   December 31, 2018   %
                 
Acquired loans - performing   $   88,353   6.37 %   $   103,667   7.70 %
Acquired loans - purchase credit impaired ("PCI")       2,772   0.20 %       3,220   0.24 %
Total acquired loans       91,125   6.57 %       106,887   7.94 %
Non-acquired loans**       1,296,061   93.43 %       1,240,035   92.06 %
Gross loans       1,387,186           1,346,922    
Net deferred costs (fees)       1,363   0.10 %       1,183   0.09 %
Total loans, net of deferred costs   $   1,388,549   0.00 %   $   1,348,105   0.00 %
                 
** Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments. 

At 2019Q2 acquired performing loans, which totaled $88.4 million, included a $1.5 million net acquisition accounting fair market value adjustment, representing a 1.66% “mark” and PCI loans which totaled $2.8 million, included a $684,000 adjustment, representing a 19.78% “mark.”

Total deposits increased $64.8 million or 4.53% (9.06% annualized) to $1,494.4 million at 2019Q2 compared to 2018Q4. Non-interest bearing demand deposits have increased $17.3 million or 8.3% to $226.7 million (15.2% of deposits) at 2019Q2 compared to $209.4 million (14.7% of deposits) at 2018Q4. The Bank typically experiences a reduction in transaction deposits during the first quarter as our business customers use transaction account balances to pay expenses and taxes accrued in the prior year.  Transaction accounts decreased $13.3 million in first quarter of 2019 while time deposits increased $22.8 million. During the second quarter of 2019, transaction accounts increased $64.5 million while time deposits decreased $9.2 million. 

Reciprocal deposits are used to maximize FDIC insurance available to our customers. Under the Federal Deposit Insurance Act reciprocal deposits are no longer considered brokered deposits unless they exceed 20% of a bank’s liabilities or $5.0 billion. Reciprocal deposits increased $40.0 million or 17.0% to $274.9 million at 2019Q2 compared to $234.9 million at 2018Q4.  Reciprocal deposits as a percentage of the Bank’s liabilities at 2019Q2 were 17.6%.

At 2019Q2 and 2018Q4 total deposits consisted of $1,454.4 million and $1,376.5 million in retail deposits and $40.0 million and $53.1 million in brokered deposits. The Bank increased retail deposits $389.3 million or 39.4% during 2018 to $1,376.5 million at December 31, 2018 as a result of the acquisition of County First and organic growth, largely due to growth in municipal relationships. Municipal relationships include multiple accounts with treasury and cash management services, included operating and other accounts. Typically the relationships include other services and products such as payroll, lock box services, positive pay, and automated clearing house transactions. Management believes that the diversity of products and services safeguard the stability of the relationships.  Most of the municipal relationships’ balances are maintained in reciprocal deposits. To ensure available liquidity the Company has enhanced procedures to track municipal deposit concentrations and manage the impact of seasonal balance fluctuations.  

At 2019Q2 the Company has on-balance sheet liquidity of $173.2 million, which consists of cash and cash equivalents, available for sale (“AFS”) securities and equity securities carried at fair value through income. The Company generally does not pledge AFS securities. The Company had $222.5 million in available FHLB lines at June 30, 2019, which does not include any pledged AFS securities. In addition, there was $50.8 million in unpledged held-to-maturity securities available for pledging.

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. Wholesale funding as a percentage of assets decreased to 4.58% or $80.4 million at 2019Q2 compared to 6.43% or $108.5 million at 2018Q4.  Wholesale funding includes brokered deposits and Federal Home Loan Bank (“FHLB”) advances. Wholesale funding has decreased from 18.63% at December 31, 2017 (“2017Q4”) because of the Bank’s increased liquidity from organic deposit growth and the 2018 acquisition. Liquidity improved with the increase in transaction deposits and decrease in wholesale funding that began in 2018. The Company’s net loan to deposit ratio decreased from 103.1% at 2017Q4 to 92.2% at 2019Q2 and 93.5% at 2018Q4. 

Total stockholders’ equity increased $9.2 million, or 4.0%, to $163.6 million at 2019Q2 compared to $154.5 million at 2018Q4. This increase primarily resulted from net income of $7.5 million, an increase in accumulated other comprehensive income of $2.9 million and net stock related activities in connection with stock-based compensation and ESOP activity of $126,000. These increases to stockholders’ equity were partially offset by decreases due to common dividends paid of $1.3 million, and repurchases of common stock of $17,000. The Company increased its quarterly dividend from $0.10 in 2018Q4 to $0.125 in 2019. The Company’s ratio of tangible common equity to tangible assets increased to 8.63% at 2019Q2 from 8.41% at 2018Q43. The Company’s Common Equity Tier 1 (“CET1”) ratio was 10.36% at 2019Q2 and 2018Q4. The Company remains well capitalized at June 30, 2019 with a Tier 1 capital to average assets (leverage ratio) of 9.48% at 2019Q2 compared to 9.50% at 2018Q4.

Asset Quality

Non-accrual loans and OREO to total assets decreased 28 basis points from 1.62% at 2018Q4 to 1.34% at 2019Q2. Troubled debt restructured loans (“TDRs”) decreased $4.5 million or 67.1%, from $6.7 million at 2018Q4 to $2.2 million at 2019Q2.  Non-accrual loans, OREO and TDRs to total assets decreased 55 basis points from 2.02% at 2018Q4 to 1.47% at 2019Q2.

Non-accrual loans decreased $5.9 million from $19.3 million at 2018Q4 to $13.3 million at 2019Q2. The decrease in non-accrual loans during the first six months was largely the result of approximately $3.8 million of one classified relationship that was moved into OREO during the first quarter. In addition, a $1.8 million non-accrual loan was sold at carrying value with no charge-offs in 2019Q1. At 2019Q2, $10.8 million or 81% of total non-accruals of $13.3 million relate to four customer relationships.  At 2018Q4, $15.3 million or 79% of total non-accruals of $19.3 million related to four customer relationships. Non-accrual loans of $2.7 million (20%) were current with all payments of principal and interest with no impairment at 2019Q2. Delinquent non-accrual loans were $10.6 million (80%) with specific reserves of $886,000 at 2019Q2.

Classified assets decreased $3.9 million from $40.8 million at 2018Q4 to $36.9 million at 2019Q2. 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 June 30, 2019, March 31, 2019 and December 31, 2018, 2017, 2016 and 2015, respectively:

Classified Assets and Special Mention Assets  
(dollars in thousands)   As of
6/30/2019
  As of
3/31/2019
  As of
12/31/2018
  As of
12/31/2017
  As of
12/31/2016
  As of
12/31/2015
 
Classified loans                          
Substandard   $   26,146     $   24,277     $   32,226     $   40,306     $   30,463     $   31,943    
Doubtful       -         -         -         -         137         861    
Loss       -         -         -         -         -         -    
Total classified loans       26,146         24,277         32,226         40,306         30,600         32,804    
Special mention loans       -         -         -         96         -         1,642    
Total classified and special mention loans   $   26,146     $   24,277     $   32,226     $   40,402     $   30,600     $   34,446    
                           
Classified loans       26,146         24,277         32,226         40,306         30,600         32,804    
Classified securities       435         465         482         651         883         1,093    
Other real estate owned       10,307         10,949         8,111         9,341         7,763         9,449    
Total classified assets   $   36,888     $   35,691     $   40,819     $   50,298     $   39,246     $   43,346    
                           
Total classified assets as a percentage of total assets     2.10 %     2.08 %     2.42 %     3.58 %     2.94 %     3.79 %  
Total classified assets as a percentage of Risk Based Capital     18.82 %     18.52 %     21.54 %     32.10 %     26.13 %     30.19 %  

The Company reported a $375,000 provision for loan loss expense in 2019Q2 compared to $400,000 in 2018Q2. The provision for loan loss in 2019YTDQ2 was $875,000 compared to $900,000 in 2018YTDQ2. Allowance for loan loss levels decreased to 0.79% of total loans at 2019Q2 compared to 0.81% at 2018Q4. The allowance as a percentage of non-acquired loans decreased five basis points to 0.84% at 2019Q1 from 0.89% at 2018Q4.

Net charge-offs in 2019YTDQ2 were $933,000 compared to net charge-offs of $690,000 in 2018YTDQ2. 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 improvements in classified assets were offset by increases in other qualitative factors, such as increased portfolio growth and concentrations. 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 $1.7 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; or any other acquisition that we undertake in the future; plans and cost savings 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 the County First acquisition, or any other acquisition that we undertake in the future; may not be realized within the expected time frames; changes in The Community Financial Corporation or Community Bank of the Chesapeake’s strategy, costs or difficulties related to integration matters might be greater than expected; availability of and costs associated with obtaining adequate and timely sources of liquidity; the ability to maintain credit quality; 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 impact of government shutdowns or sequestration; 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, 2018, 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 June 30, 2019. 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, 2018.

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

____________________________________________

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.

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.

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.

...
           
THE COMMUNITY FINANCIAL CORPORATION          
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)          
           
  Three Months Ended           
CONDENSED CONSOLIDATED INCOME STATEMENT   June 30,   March 31,   December 31,   September 30,   June 30,            
(dollars in thousands, except per share amounts )    2019     2019     2018     2018     2018             
Interest and Dividend Income                                
  Loans, including fees    $   16,366     $   16,129     $   15,461     $   15,085     $   14,483              
  Interest and dividends on securities       1,677         1,623         1,536         1,311         1,211              
  Interest on deposits with banks       75         45         45         88         60              
Total Interest and Dividend Income       18,118         17,797         17,042         16,484         15,754              
                                 
Interest Expense                                
  Deposits       3,966         3,768         3,486         2,835         2,405              
  Short-term borrowings       235         334         125         142         217              
  Long-term debt       658         658         606         746         721              
Total Interest Expense       4,859         4,760         4,217         3,723         3,343              
                                 
Net Interest Income (NII)       13,259         13,037         12,825         12,761         12,411              
  Provision for loan losses       375         500         465         40         400              
                                 
NII After Provision For Loan Losses        12,884         12,537         12,360         12,721         12,011                
                                 
Noninterest Income                                
Loan appraisal, credit, and misc. charges       138         58         42         81         7              
Gain on sale of asset       -         -         -         -         1              
Unrealized gains (losses) on equity securities       65         56         5         (8 )       (78 )            
Income from bank owned life insurance       222         217         225         227         224              
Service charges       828         730         794         770         747              
Total Noninterest Income       1,253         1,061         1,066         1,070         901              
                                 
Noninterest Expense                                
Salary and employee benefits       4,881         4,803         4,633         4,739         5,129              
Occupancy expense       753         806         867         744         739              
Advertising       163         197         167         165         180              
Data processing expense        755         720         786         769         782              
Professional fees       606         418         293         442         426              
Merger and acquisition costs       -         -         5         11         741              
Depreciation of premises and equipment       166         189         202         207         202              
Telephone communications       66         52         47         62         69              
Office supplies       33         37         37         31         41              
FDIC Insurance       160         175         158         185         113              
OREO valuation allowance and expenses       432         56         141         165         237              
Core deposit intangible amortization       175         181         187         193         199              
Other       926         771         718         779         891              
Total Noninterest Expense       9,116         8,405         8,241         8,492         9,749