The Community Financial Corporation Reports a 44% Increase in Net Income for the Nine Months Ended September 30, 2017

WALDORF, Md., Oct. 20, 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 third quarter and nine months ended September 30, 2017. Net income was $2.8 million for the three months ended September 30, 2017, an increase of $819,000 or 41.7%, compared to $2.0 million for the three months ended September 30, 2016. Earnings per common share (diluted) at $0.60 increased $0.18 from $0.42 per common share (diluted) for the three months ended September 30, 2016. The Company’s returns on average assets and common stockholders’ equity for the third quarter of 2017 were 0.80% and 9.99%, respectively, compared to 0.63% and 7.48%, respectively, for the third quarter of 2016.

Net income was $7.7 million for the nine months ended September 30, 2017, an increase of $2.4 million or 44.4%, compared to $5.3 million for the nine months ended September 30, 2016. Earnings per common share (diluted) for the first nine months of 2017 were $1.65 increasing $0.50 from $1.15 per common share (diluted) for the nine months ended September 30, 2016. The Company’s returns on average assets and common stockholders’ equity for the nine months ended September 30, 2017 were 0.75% and 9.38%, respectively, compared to 0.59% and 6.89%, respectively, for first nine months of 2016.

On July 31, 2017, the Company and Community Bank of the Chesapeake entered into an Agreement and Plan of Merger with County First Bank (“County First”). Merger related costs, which included mainly professional fees and investment banking costs, for the three months and nine months ended September 30, 2017 were $239,000 and $494,000, respectively. These costs reduced diluted earnings per share by $0.03 and $0.07, respectively, for the three and nine months ended September 30, 2017. At June 30, 2017, County First had total assets of $224 million, total deposits of $209 million, and five branch offices in La Plata, Waldorf, New Market, Prince Frederick and California, Maryland.

The Company continued to improve quarterly results, recording its eighth consecutive quarter of earnings growth. Net income of $2.8 million for the three months ended September 30, 2017 increased $239,000 compared to $2.5 million of net income for the second quarter of 2017. Earnings per common share (diluted) at $0.60 increased $0.05 from $0.55 per common share (diluted) for the three months ended June 30, 2017. The Company’s returns on average assets and common stockholders’ equity for the third quarter of 2017 were 0.80% and 9.99%, respectively, compared to 0.74% and 9.36%, respectively, and 0.70% and 8.78%, respectively, for the second and first quarters of 2017. The increase in net income in the third quarter was the result of increased operating revenues of $180,000, decreases in the provision for loan losses of $152,000 and noninterest expense of $88,000. These increases to pretax earnings were offset by a higher income tax expense of $181,000. The Company’s loan portfolio increased to $1,145.4 million at September 30, 2017, an increase of $3.4 million compared to second quarter ending loan balances of $1,142.0 million.

“Since December 31, 2016, loans have grown $56.0 million or 7% annualized to $1,145.0 million at September 30, 2017. We experienced a seasonal slowdown in loan growth in the third quarter. Scheduled loan closings in the fourth quarter are expected to produce annual growth of 8% to 9%,” stated William J. Pasenelli, Chief Executive Officer and Vice-Chairman of the Board.

“I am pleased with our accomplishments in improving credit quality and controlling expense growth”, stated James Burke, President of the Bank and Chief Risk Officer of the Company. “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 0.91% at September 30, 2017. During the same timeframe, the Company’s efficiency ratio1 improved 13 percentage points from 74% for the three months ended December 31, 2015 to 61% for the third quarter of 2017.”

Net interest margin for the three months ended September 30, 2017 was stable compared to the second quarter of 2017, decreasing one basis point from 3.39% to 3.38%, respectively. The decrease was expected and attributable to a slightly faster increase in the Company’s cost of funds compared to increased yields for loans and investments. The increase in cost of funds to 0.84% for the three months ended September 30, 2017 from 0.79% for the second quarter 2017 was primarily due to rising short-term wholesale funding rates during the first nine months of 2017. A very positive trend in mitigating net interest rate compression was $22.7 million in growth of average transaction deposits which increased from $619.0 million in the second quarter to $641.7 million in the third quarter of 2017. Transaction accounts include savings, money market and noninterest-bearing and interest-bearing demand accounts. The Company considers increasing transaction accounts over other funding choices as a key strategy to offset the current flat rate environment. Average transaction account costs increased three basis points during the quarter from 0.23% for the three months ended June 30, 2017 to 0.26% for the three months ended September 30, 2017.

Loan yields increased three basis points during the third quarter of 2017 to 4.49% compared to 4.46% for the previous quarter. Overall loan and investment yields increased during the third quarter from 4.16% during the second quarter of 2017 to 4.20% for the three months ended September 30, 2017. The increase in interest-earning yields was due to larger dollar growth in the higher yielding commercial real estate and residential rental portfolios compared to the residential first mortgage portfolio. In addition, the scheduled repricing of loans, the purchase of securities and the production of commercial real estate loans also contributed to increased yields. Yields in the commercial real estate portfolio, the Company’s largest loan portfolio at $712.8 million as of September 30, 2017, increased seven basis points during the third quarter to 4.46% compared to 4.39% in second quarter.

The Company closed its Central Park Fredericksburg branch during the third quarter of 2017. This location continues to serve as a loan production office and the branch closure did not have a material effect on operations. The Company offered branch employees open positions.

Net Interest Income

Net interest income increased 8.5% or $864,000 million to $11.0 million for the three months ended September 30, 2017 compared to $10.1 million for the three months ended September 30, 2016. Net interest margin at 3.38% for the three months ended September 30, 2017 decreased nine basis points from 3.47% for the three months ended September 30, 2016. Average interest-earning assets were $1,304.0 million for the third quarter of 2017, an increase of $134.1 million or 11.5%, compared to $1,169.9 million for the same quarter of 2016.

Net interest income increased 10.8% or $3.2 million to $32.6 million for the nine months ended September 30, 2017 compared to $29.4 million for the nine months ended September 30, 2016. Net interest margin at 3.39% for the nine months ended September 30, 2017, decreased 11 basis points from 3.50% for the nine months ended September 30, 2016. Average interest-earning assets were $1,282.4 million for the first nine months of 2017, an increase of $159.8 million or 14.2%, compared to $1,122.6 million for the first nine months of 2016.

Net interest margin declined during the nine months ended September 30, 2017, primarily due to reduced yields on loans and a slight increase in cost of funds. Yields on the loan portfolio decreased from 4.57% for the nine months ended September 30, 2016 to 4.46% for nine months ended September 30, 2017. Yields were reduced compared to the prior year due primarily to the Bank’s increased investment in residential mortgages during 2016, current competition for commercial real estate loans and other commercial loans and low intermediate term interest rates that were depressed for most of 2016.

During the second and third quarter of 2017, loan yields began to rise compared to 2016, 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.

An increase in the cost of funds impacted net interest margin for the comparable periods. The cost of funds increased six basis points to 0.79% for the nine months ended September 30, 2017 compared to 0.73% for the nine months ended September 30, 2016. The Company continued to control 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 nine months ended September 30, 2017 increased $62.9 million, or 11.2%, to $622.3 million compared to $559.4 million for the comparable period in 2016. Average transaction accounts as a percentage of total deposits increased from 57.8% for the nine months ended September 30, 2016 to 58.5% for the nine months ended September 30, 2017.

Wholesale and time-based funding rates are typically more sensitive to rising interest rates than transactional deposits. Compared to the nine months ended September 30, 2016, interest rates for the first nine months of 2017 increased by nine basis points to 0.95% on certificates of deposit, while interest-bearing transactional deposits increased by three basis points to 0.31%. Federal Home Loan Bank (“FHLB”) short-term borrowings increased by 59 basis points to 1.08% for the nine months ended September 30, 2017 compared to 0.49% for the same period during 2016. The Company’s increases in transaction deposits during the last twelve months have decreased downward pressure on net interest margin. The ability to increase transaction deposits faster than wholesale funding could mitigate possible downward pressure on net interest margin in a rising rate environment.

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

Noninterest Income and Noninterest Expense

Noninterest income increased by $315,000 to $1.2 million for the three months ended September 30, 2017 compared to $842,000 for the three months ended September 30, 2016. Noninterest income increased by $615,000 to $3.1 million for the nine months ended September 30, 2017 compared to $2.5 million for the nine months ended September 30, 2016. The increase in income for the nine months was principally due to OREO losses recognized in 2016 not recognized in 2017 and gains on loans held for sale in 2017, 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 has continued during 2017.

For the three months ended September 30, 2017, noninterest expense increased 1.8%, or $131,000, to $7.4 million from $7.3 million for the comparable period in 2016. Third quarter 2017 operating expenses included $239,000 of merger related costs, comprising primarily professional fees and investment banking costs. The Company’s efficiency ratio for the three months ended September 30, 2017 and 2016 was 61.18% and 66.55%, respectively. The Company’s net operating expense ratio2 as a percentage of average assets for the three months ended September 30, 2017 and 2016 was 1.80% and 2.06%, 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:

Three Months Ended September 30,
(dollars in thousands) 2017 2016 $ Change % Change
Compensation and Benefits $ 4,056 $ 4,268 $ (212) (5.0%)
OREO Valuation Allowance and Expenses 283 203 80 39.4%
Operating Expenses 3,103 2,840 263 9.3%
Total Noninterest Expense $ 7,442 $ 7,311 $ 131 1.8%

For the nine months ended September 30, 2017, noninterest expense increased 2.3%, or $508,000, to $22.3 million from $21.8 million for the comparable period in 2016. The first nine months of 2017 the Company controlled growth in compensation and benefits expense, reducing expense $50,000 or 0.4%, compared to the same period in the prior year. Total growth in compensation and benefit costs was 2.7% and 3.2%, respectively for the years ended December 31, 2016 and 2015. Year to date 2017 operating expenses included $494,000 of merger related costs, comprising primarily professional fees and investment banking costs. The Company’s efficiency ratio for the nine months ended September 30, 2017 and 2016 was 62.61% and 68.47%, respectively. The Company’s net operating expense ratio as a percentage of average assets for the nine months ended September 30, 2017 and 2016 was 1.88% and 2.14%, respectively. The following is a summary breakdown of noninterest expense:

Nine Months Ended September 30,
(dollars in thousands) 2017 2016 $ Change % Change
Compensation and Benefits $ 12,567 $ 12,617 $ (50) (0.4%)
OREO Valuation Allowance and Expenses 623 609 14 2.3%
Operating Expenses 9,161 8,617 544 6.3%
Total Noninterest Expense $ 22,351 $ 21,843 $ 508 2.3%

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

Balance Sheet and Asset Quality

Balance Sheet

Total assets at September 30, 2017 were $1.40 billion, an increase of $67.9 million or 6.8% 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 $56.5 million, or 7.0% annualized growth, from $1,079.5 million at December 31, 2016 to $1,136.0 million at September 30, 2017, principally due to increases in the commercial real estate and residential rentals portfolios.

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

(dollars in thousands) September 30, 2017 % December 31, 2016 %
Commercial real estate $ 712,840 62.24% $ 667,105 61.25%
Residential first mortgages 175,816 15.35% 171,004 15.70%
Residential rentals 110,905 9.68% 101,897 9.36%
Construction and land development 31,094 2.71% 36,934 3.39%
Home equity and second mortgages 22,334 1.95% 21,399 1.97%
Commercial loans 56,376 4.92% 50,484 4.64%
Consumer loans 541 0.05% 422 0.04%
Commercial equipment 35,500 3.10% 39,737 3.65%
1,145,406 100.00% 1,088,982 100.00%
Less:
Deferred loan fees and premiums (1,033) -0.09% (397) -0.04%
Allowance for loan losses 10,435 0.91% 9,860 0.91%
9,402 9,463
$ 1,136,004 $ 1,079,519

Deposits increased by 7.6% annualized, or $59.2 million, to $1,098.0 million at September 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 September 30, 2017 and December 31, 2016 were $137.6 million and $131.0 million, respectively. Reciprocal brokered deposits are used to maximize FDIC insurance available to our customers. Reciprocal brokered deposits at September 30, 2017 and December 31, 2016 were $99.6 million and $70.7 million, respectively. The following is a breakdown of the Company’s deposit portfolio at September 30, 2017 and December 31, 2016:

September 30, 2017 December 31, 2016
(dollars in thousands) Balance % Balance %
Noninterest-bearing demand $ 157,665 14.36% $ 144,877 13.95%
Interest-bearing:
Demand 195,632 17.82% 162,823 15.67%
Money market deposits 229,740 20.92% 248,049 23.88%
Savings 54,310 4.95% 50,284 4.84%
Certificates of deposit 460,654 41.95% 432,792 41.66%
Total interest-bearing 940,336 85.64% 893,948 86.05%
Total Deposits $ 1,098,001 100.00% $ 1,038,825 100.00%
Transaction accounts $ 637,347 58.05% $ 606,033 58.34%

FHLB long-term debt and short-term borrowings increased $2.4 million from $144.6 million at December 31, 2016 to $147.0 million at September 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 nine months ended September 30, 2017, stockholders’ equity increased $6.5 million to $110.9 million. The increase in stockholders’ equity was due to net income of $7.7 million, a current year decrease in accumulated other comprehensive loss of $390,000 and net stock related activities related to stock-based compensation of $578,000. These increases to capital were partially offset by quarterly common dividends paid of $1.4 million and the purchases of 23,503 shares of the Company’s common shares for $823,000 by the Employee Stock Ownership Plan (“ESOP”) during the third quarter of 2017. The ESOP has promissory notes with the Company for the purchase of TCFC common stock for the benefit of the participants in the Plan. Loan terms are at prime rate plus one-percentage point and amortize over seven (7) years. As principal is repaid, common shares are allocated to participants based on the participant account allocation rules described in the Plan. The Bank is a guarantor of the ESOP debt with the Company. Unencumbered shares held by the ESOP are treated as outstanding in computing earnings per share. Shares issued to the ESOP but pledged as collateral for loans obtained to provide funds to acquire the shares are not treated as outstanding in computing earnings per share.

Common stockholders' equity of $110.9 million at September 30, 2017 resulted in a book value of $23.85 per common share compared to $22.54 at December 31, 2016. The Company remains well-capitalized at September 30, 2017 with a Tier 1 capital to average assets ratio of 8.82%.

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 is enforcing its contractual rights. Management believes this strategy is in the best long-term interest of the Company. Because 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 0.91% at September 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 1.63% at September 30, 2017.

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 September 30, 2017, June 30, 2017, March 31, 2017 and December 31, 2016, 2015, 2014 and 2013, respectively:

Classified Assets and Special Mention Assets
(dollars in thousands) As of
09/30/2017
As of
06/30/2017
As of
03/31/2017
As of
12/31/2016
As of
12/31/2015
As of
12/31/2014
As of
12/31/2013
Classified loans
Substandard $ 28,734 $ 25,519 $ 28,920 $ 30,463 $ 31,943 $ 46,735 $ 47,645
Doubtful - - - 137 861 - -
Loss - - - - - - -
Total classified loans 28,734 25,519 28,920 30,600 32,804 46,735 47,645
Special mention loans 10,446 1,357 1,374 - 1,642 5,460 9,246
Total classified and special mention loans $ 39,180 $ 26,876 $ 30,294 $ 30,600 $ 34,446 $ 52,195 $ 56,891
Classified loans 28,734 25,519 28,920 30,600 32,804 46,735 47,645
Classified securities 697 740 791 883 1,093 1,404 2,438
Other real estate owned 9,741 9,154 6,747 7,763 9,449 5,883 6,797
Total classified assets $ 39,172 $ 35,413 $ 36,458 $ 39,246 $ 43,346 $ 54,022 $ 56,880
As a percentage of Total Assets 2.79% 2.54% 2.69% 2.94% 3.79% 4.99% 5.56%
As a percentage of Risk Based Capital 24.97% 22.81% 23.91% 26.13% 30.19% 39.30% 43.11%

The allowance for loan losses was 0.91% of gross loans at September 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 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 September 30, 2017 and December 31, 2016, respectively:

(dollar in thousands) September 30, 2017 % of Gross
Loans
December 31, 2016 % of Gross
Loans
General Allowance $ 9,617 0.84% $ 8,571 0.79%
Specific Allowance 818 0.07% 1,289 0.12%
Total Allowance $ 10,435 0.91% $ 9,860 0.91%

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 nine months ended September 30, 2017 and 2016, respectively, and a five-year trend:

Three Months Ended September 30, Nine Months Ended September 30, Years Ended December 31,
(dollars in thousands) 2017 2016 2017 2016 2016 2015 2014 2013 2012
Average loans $ 1,127,626 $ 1,016,408 $ 1,107,618 $ 967,568 $ 988,288 $ 874,186 $ 819,381 $ 741,369 $ 719,798
Net charge-offs 223 141 405 566 1,039 1,374 2,309 1,049 1,937
Net charge-offs to average loans 0.08% 0.06% 0.05% 0.08% 0.11% 0.16% 0.28% 0.14% 0.27%

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 $1.4 billion. Through its 11 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 10 branch offices in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby and California, Maryland; 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, 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 September 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.

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


THE COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
Three Months Ended September 30, Nine Months Ended September 30,
(dollars in thousands, except per share amounts ) 2017 2016 2017 2016
Interest and Dividend Income
Loans, including fees $ 12,671 $ 11,460 $ 37,051 $ 33,175
Interest and dividends on investment securities 988 758 2,907 2,273
Interest on deposits with banks 21 5 39 15
Total Interest and Dividend Income 13,680 12,223 39,997 35,463
Interest Expense
Deposits 1,563 1,209 4,234 3,486
Short-term borrowings 304 36 734 123
Long-term debt 805 834 2,414 2,422
Total Interest Expense 2,672 2,079 7,382 6,031
Net Interest Income 11,008 10,144 32,615 29,432
Provision for loan losses 224 698 980 1,689
Net Interest Income After Provision For Loan Losses 10,784 9,446 31,635 27,743
Noninterest Income
Loan appraisal, credit, and miscellaneous charges 28 60 84 223
Gain on sale of asset - - 47 4
Net gains (losses) on sale of OREO - 3 36 (440)
Net gains on sale of investment securities - - 133 39
Income from bank owned life insurance 196 199 581 593
Service charges 639 580 1,909 2,050
Gain on sale of loans held for sale 294 - 294 -
Total Noninterest Income 1,157 842 3,084 2,469
Noninterest Expense
Salary and employee benefits 4,056 4,268 12,567 12,617
Occupancy expense 630 597 1,941 1,822
Advertising 156 290 404 509
Data processing expense 555 544 1,766 1,678
Professional fees 749 308 1,684 1,113
Depreciation of furniture, fixtures, and equipment 191 206 594 608
Telephone communications 46 43 142 133
Office supplies 26 33 86 105
FDIC Insurance 178 215 505 642
OREO valuation allowance and expenses 283 203 623 609
Other 572 604 2,039 2,007
Total Noninterest Expense 7,442 7,311 22,351 21,843
Income before income taxes 4,499 2,977 12,368 8,369
Income tax expense 1,717 1,014 4,701 3,060
Net Income $ 2,782 $ 1,963 $ 7,667 $ 5,309
Earnings Per Common Share
Basic $ 0.60 $ 0.43 $ 1.66 $ 1.16
Diluted $ 0.60 $ 0.42 $ 1.65 $ 1.15
Cash dividends paid per common share $ 0.10 $ 0.10 $ 0.30 $ 0.30

THE COMMUNITY FINANCIAL CORPORATION
AVERAGE CONSOLIDATED BALANCE SHEETS AND NET INTEREST INCOME
UNAUDITED
For the Three Months Ended September 30, For the Nine Months Ended September 30,
2017 2016 2017 2016
Average Average Average Average
Average Yield/ Average Yield/ Average Yield/ Average Yield/
dollars in thousandsBalance Interest Cost Balance Interest Cost Balance Interest Cost Balance Interest Cost
Assets
Interest-earning assets:
Loan portfolio$ 1,127,626 $ 12,671 4.49% $ 1,016,408 $ 11,460 4.51% $ 1,107,618 $ 37,051 4.46% $ 967,568 $ 33,175 4.57%
Investment securities, federal funds
sold and interest-bearing deposits 176,360 1,009 2.29% 153,443 763 1.99% 174,813 2,946 2.25% 155,033 2,288 1.97%
Total Interest-Earning Assets 1,303,986 13,680 4.20% 1,169,851 12,223 4.18% 1,282,431 39,997 4.16% 1,122,601 35,463 4.21%
Cash and cash equivalents 18,199 13,166 14,555 11,567
Other assets 74,274 71,948 72,597 72,384
Total Assets$ 1,396,459 $ 1,254,965 $ 1,369,583 $ 1,206,552
Liabilities and Stockholders' Equity
Interest-bearing liabilities:
Savings$ 55,125 $ 7 0.05% $ 50,363 $ 6 0.05% $ 53,369 $ 20 0.05% $ 48,290 $ 32 0.09%
Interest-bearing demand and money
market accounts 429,847 412 0.38% 400,214 297 0.30% 418,148 1,073 0.34% 371,113 837 0.30%
Certificates of deposit 443,048 1,144 1.03% 412,683 904 0.88% 442,410 3,141 0.95% 407,731 2,616 0.86%
Long-term debt 58,019 352 2.43% 65,578 386 2.35% 59,783 1,028 2.29% 58,804 1,083 2.46%
Short-term debt 96,908 304 1.25% 31,886 37 0.46% 90,460 734 1.08% 33,471 123 0.49%
Subordinated Notes 23,000 359 6.24% 23,000 359 6.24% 23,000 1,078 6.25% 23,000 1,078 6.25%
Guaranteed preferred beneficial interest
in junior subordinated debentures 12,000 94 3.13% 12,000 90 3.00% 12,000 308 3.42% 12,000 262 2.91%
Total Interest-Bearing Liabilities 1,117,947 2,672 0.96% 995,724 2,079 0.84% 1,099,170 7,382 0.90% 954,409 6,031 0.84%
Noninterest-bearing demand deposits 156,746 144,837 150,757 140,031
Other liabilities 10,409 9,419 10,700 9,336
Stockholders' equity 111,357 104,985 108,956 102,776
Total Liabilities and Stockholders' Equity$ 1,396,459 $ 1,254,965 $ 1,369,583 $ 1,206,552
Net interest income $ 11,008 $ 10,144 $ 32,615 $ 29,432
Interest rate spread 3.24% 3.34% 3.26% 3.37%
Net yield on interest-earning assets 3.38% 3.47% 3.39% 3.50%
Ratio of average interest-earning
assets to average interest bearing
liabilities 116.64% 117.49% 116.67% 117.62%
Cost of funds 0.84% 0.73% 0.79% 0.73%
Cost of deposits 0.58% 0.48% 0.53% 0.48%
Cost of debt 2.34% 2.63% 2.27% 2.67%
Note: Loan average balance includes non-accrual loans. There are no tax equivalency adjustments.

THE COMMUNITY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 2017
(dollars in thousands, except per share amounts) (Unaudited) December 31, 2016
Assets
Cash and due from banks $ 15,627 $ 9,948
Interest-bearing deposits with banks 1,577 1,315
Securities available for sale (AFS), at fair value 61,376 53,033
Securities held to maturity (HTM), at amortized cost 104,530 109,247
Federal Home Loan Bank (FHLB) stock - at cost 7,447 7,235
Loans receivable - net of allowance for loan losses of $10,435 and $9,860 1,136,004 1,079,519
Premises and equipment, net 21,751 22,205
Premises and equipment held for sale - 345
Other real estate owned (OREO) 9,741 7,763
Accrued interest receivable 4,494 3,979
Investment in bank owned life insurance 29,206 28,625
Other assets 10,419 11,043
Total Assets $ 1,402,172 $ 1,334,257
Liabilities and Stockholders' Equity
Liabilities
Deposits
Non-interest-bearing deposits $ 157,665 $ 144,877
Interest-bearing deposits 940,336 893,948
Total deposits 1,098,001 1,038,825
Short-term borrowings 91,500 79,000
Long-term debt 55,514 65,559
Guaranteed preferred beneficial interest in junior subordinated debentures (TRUPs) 12,000 12,000
Subordinated notes - 6.25% 23,000 23,000
Accrued expenses and other liabilities 11,272 11,447
Total Liabilities 1,291,287 1,229,831
Stockholders' Equity
Common stock - par value $.01; authorized - 15,000,000 shares; issued 4,649,302 and 4,633,868 shares, respectively 46 46
Additional paid in capital 47,994 47,377
Retained earnings 64,375 58,100
Accumulated other comprehensive loss (538) (928)
Unearned ESOP shares (992) (169)
Total Stockholders' Equity 110,885 104,426
Total Liabilities and Stockholders' Equity $ 1,402,172 $ 1,334,257

THE COMMUNITY FINANCIAL CORPORATION
SELECTED CONSOLIDATED FINANCIAL DATA
Three Months Ended (Unaudited) Nine Months Ended (Unaudited)
September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
KEY OPERATING RATIOS
Return on average assets 0.80% 0.63% 0.75 % 0.59 %
Return on average common equity 9.99 7.48 9.38 6.89
Average total equity to average total assets 7.97 8.37 7.96 8.52
Interest rate spread 3.24 3.34 3.26 3.37
Net interest margin 3.38 3.47 3.39 3.50
Cost of funds 0.84 0.73 0.79 0.73
Cost of deposits 0.58 0.48 0.53 0.48
Cost of debt 2.34 2.63 2.27 2.67
Efficiency ratio 61.18 66.55 62.61 68.47
Non-interest expense to average assets 2.13 2.33 2.18 2.41
Net operating expense to average assets 1.80 2.06 1.88 2.14
Avg. int-earning assets to avg. int-bearing liabilities 116.64 117.49 116.67 117.62
Net charge-offs to average loans 0.08 0.06 0.05 0.08
COMMON SHARE DATA
Basic net income per common share $ 0.60 $ 0.43 $ 1.66 $ 1.16
Diluted net income per common share 0.60 0.42 1.65 1.15
Cash dividends paid per common share 0.10 0.10 0.30 0.30
Weighted average common shares outstanding:
Basic 4,633,391 4,590,664 4,631,571 4,591,926
Diluted 4,633,417 4,622,579 4,633,500 4,621,628
(Unaudited)
(dollars in thousands, except per share amounts) September 30, 2017 December 31, 2016 $ Change % Change
ASSET QUALITY
Total assets $ 1,402,172 $ 1,334,257 $ 67,915 5.1 %
Gross loans 1,145,406 1,088,982 56,424 5.2
Classified Assets 39,172 39,246 (74) (0.2)
Allowance for loan losses 10,435 9,860 575 5.8
Past due loans (PDLs) (31 to 89 days) 1,642 1,034 608 58.8
Nonperforming loans (NPLs) (>=90 days) 2,741 7,705 (4,964) (64.4)
Non-accrual loans (a) 3,012 8,374 (5,362) (64.0)
Accruing troubled debt restructures (TDRs) (b) 10,069 10,448 (379) (3.6)
Other real estate owned (OREO) 9,741 7,763 1,978 25.5
Non-accrual loans, OREO and TDRs $ 22,822 $ 26,585 $ (3,763) (14.2)
ASSET QUALITY RATIOS
Classified assets to total assets 2.79% 2.94%
Classified assets to risk-based capital 24.97 26.13
Allowance for loan losses to total loans 0.91 0.91
Allowance for loan losses to nonperforming loans 380.70 127.97
Past due loans (PDLs) to total loans 0.14 0.09
Nonperforming loans (NPLs) to total loans 0.24 0.71
Loan delinquency (PDLs + NPLs) to total loans 0.38 0.80
Non-accrual loans to total loans 0.26 0.77
Non-accrual loans and TDRs to total loans 1.14 1.73
Non-accrual loans and OREO to total assets 0.91 1.21
Non-accrual loans, OREO and TDRs to total assets 1.63 1.99
COMMON SHARE DATA
Book value per common share $ 23.85 $ 22.54
Common shares outstanding at end of period 4,649,302 4,633,868
OTHER DATA
Full-time equivalent employees 169 162
Branches 11 12
Loan Production Offices 5 5
REGULATORY CAPITAL RATIOS
Tier 1 capital to average assets 8.82% 9.02%
Tier 1 common capital to risk-weighted assets 9.81 9.54
Tier 1 capital to risk-weighted assets 10.87 10.62
Total risk-based capital to risk-weighted assets 13.81 13.60
(a) Non-accrual loans include all loans that are 90 days or more delinquent and loans that are non-accrual due to the operating results or cash flows of a customer. Non-accrual loans can include loans that are current with all loan payments.
(b) At September 30, 2017 and December 31, 2016, the Bank had total TDRs of $10.9 million and $15.1 million, respectively, with $828,000 and $4.7 million, respectively, in non-accrual status. These loans are classified as non-accrual loans for the calculation of financial ratios.

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
Three Months Ended
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands, except per share amounts ) 2017 2017 2017 2016 2016
Interest and Dividend Income
Loans, including fees $ 12,671 $ 12,410 $ 11,970 $ 11,744 $ 11,460
Interest and dividends on securities 988 973 946 835 758
Interest on deposits with banks 21 12 6 5 5
Total Interest and Dividend Income 13,680 13,395 12,922 12,584 12,223
Interest Expense
Deposits 1,563 1,403 1,269 1,210 1,209
Short-term borrowings 304 283 147 73 36
Long-term debt 805 776 832 828 834
Total Interest Expense 2,672 2,462 2,248 2,111 2,079
Net Interest Income (NII) 11,008 10,933 10,674 10,473 10,144
Provision for loan losses 224 376 380 670 698
NII After Provision For Loan Losses 10,784 10,557 10,294 9,803 9,446
Noninterest Income
Loan appraisal, credit, and misc. charges 28 9 47 66 60
Gain on sale of asset - 47 - 8 -
Net gains (losses) on sale of OREO - 9 27 4 3
Net gains (losses) on sale of investment securities - 133 - (8) -
Income from bank owned life insurance 196 194 191 196 199
Service charges 639 660 610 625 580
Gain on sale of loans held for sale 294 - - - -
Total Noninterest Income 1,157 1,052 875 891 842
Noninterest Expense
Salary and employee benefits 4,056 4,198 4,313 4,193 4,268
Occupancy expense 630 658 653 666 597
Advertising 156 140 108 138 290
Data processing expense 555 634 577 589 544
Professional fees 749 598 337 455 308
Depr.of furniture, fixtures, and equipment 191 204 199 204 206
Telephone communications 46 45 51 41 43
Office supplies 26 28 32 31 33
FDIC Insurance 178 161 166 97 215
OREO valuation allowance and expenses 283 145 195 252 203
Other 572 719 748 650 604
Total Noninterest Expense 7,442 7,530 7,379 7,316 7,311
Income before income taxes 4,499 4,079 3,790 3,378 2,977
Income tax expense 1,717 1,536 1,448 1,356 1,014
Net Income $ 2,782 $ 2,543 $ 2,342 $ 2,022 $ 1,963
THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
Three Months Ended
September 30, June 30, March 31, December 31, September 30,
(dollars in thousands, except per share amounts ) 2017 2017 2017 2016 2016
KEY OPERATING RATIOS
Return on average assets 0.80% 0.74% 0.70% 0.62 % 0.63%
Return on average common equity 9.99 9.36 8.78 7.68 7.48
Average total equity to average total assets 7.97 7.91 7.98 8.11 8.37
Interest rate spread 3.24 3.27 3.29 3.33 3.34
Net interest margin 3.38 3.39 3.40 3.45 3.47
Cost of funds 0.84 0.79 0.74 0.71 0.73
Cost of deposits 0.58 0.53 0.48 0.47 0.48
Cost of debt 2.34 2.22 2.24 2.26 2.63
Efficiency ratio 61.18 62.83 63.89 64.38 66.55
Non-interest expense to average assets 2.13 2.19 2.21 2.26 2.33
Net operating expense to average assets 1.80 1.89 1.94 1.98 2.06
Avg. int-earning assets to avg. int-bearing liabilities 116.64 117.07 116.29 117.37 117.49
Net charge-offs to average loans 0.08 0.02 0.05 0.18 0.06
COMMON SHARE DATA
Basic net income per common share $ 0.60 $ 0.55 $ 0.51 $ 0.44 $ 0.43
Diluted net income per common share 0.60 0.55 0.51 0.44 0.42
Cash dividends paid per common share 0.10 0.10 0.10 0.10 0.10
Weighted average common shares outstanding:
Basic 4,633,391 4,632,911 4,628,357 4,574,707 4,590,644
Diluted 4,633,417 4,635,483 4,630,398 4,606,676 4,622,579
ASSET QUALITY
Total assets $ 1,402,172 $ 1,392,688 $ 1,356,073 $ 1,334,257 $ 1,281,874
Gross loans 1,145,406 1,142,010 1,113,742 1,088,982 1,051,419
Classified Assets 39,172 35,413 36,458 39,246 40,234
Allowance for loan losses 10,435 10,434 10,109 9,860 9,663
Past due loans (PDLs) (31 to 89 days) 1,642 1,081 231 1,034 723
Nonperforming loans (NPLs) (>=90 days) 2,741 3,782 7,168 7,705 7,778
Non-accrual loans 3,012 4,442 7,830 8,374 8,455
Accruing troubled debt restructures (TDRs) 10,069 10,228 10,264 10,448 10,595
Other real estate owned (OREO) 9,741 9,154 6,747 7,763 8,620
Non-accrual loans, OREO and TDRs $ 22,822 $ 23,824 $ 24,841 $ 26,585 $ 27,670
ASSET QUALITY RATIOS
Classified assets to total assets 2.79% 2.54% 2.69% 2.94 % 3.14%
Classified assets to risk-based capital 24.97 22.81 23.91 26.13 27.08
Allowance for loan losses to total loans 0.91 0.91 0.91 0.91 0.92
Allowance for loan losses to nonperforming loans 380.70 275.89 141.03 127.97 124.24
Past due loans (PDLs) to total loans 0.14 0.09 0.02 0.09 0.07
Nonperforming loans (NPLs) to total loans 0.24 0.33 0.64 0.71 0.74
Loan delinquency (PDLs + NPLs) to total loans 0.38 0.43 0.66 0.80 0.81
Non-accrual loans to total loans 0.26 0.39 0.70 0.77 0.80
Non-accrual loans and TDRs to total loans 1.14 1.28 1.62 1.73 1.81
Non-accrual loans and OREO to total assets 0.91 0.98 1.07 1.21 1.33
Non-accrual loans, OREO and TDRs to total assets 1.63 1.71 1.83 1.99 2.16
COMMON SHARE DATA
Book value per common share $ 23.85 $ 23.51 $ 22.96 $ 22.54 $ 22.33
Common shares outstanding at end of period 4,649,302 4,648,199 4,641,342 4,633,868 4,656,989
OTHER DATA
Full-time equivalent employees 169 165 165 162 166
Branches 11 12 12 12 12
Loan Production Offices 5 5 5 5 5
REGULATORY CAPITAL RATIOS
Tier 1 capital to average assets 8.82% 8.85% 8.91% 9.02 % 9.22 %
Tier 1 common capital to risk-weighted assets 9.81 9.70 9.62 9.54 9.75
Tier 1 capital to risk-weighted assets 10.87 10.77 10.69 10.62 10.87
Total risk-based capital to risk-weighted assets 13.81 13.72 13.66 13.60 13.94

Source:The Community Financial Corporation