The Community Financial Corporation Operating Results for the Three Months Ended and Year Ended December 31, 2019

WALDORF, Md., Jan. 31, 2020 (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 fourth quarter and year ended December 31, 2019.

The Company reported net income for the three months ended December 31, 2019 of $4.1 million or diluted earnings per share of $0.73 compared to a net income for the fourth quarter of 2018 of $3.8 million or a diluted earnings per share of $0.69. The Company's return on average assets ("ROAA") and return on average common equity ("ROACE") were 0.91% and 9.58% for the three months ended December 31, 2019 compared to 0.93% and 10.01% for the three months ended December 31, 2018. For the three months ended September 30, 2019, net income, diluted earnings per share, ROAA and ROACE were $3.7 million, $0.66, 0.84% and 8.86%, respectively.

Net income for the year ended December 31, 2019 was $15.3 million or  $2.75 per diluted share compared to net income of $11.2 million or $2.02 per diluted share for the year ended December 31, 2018. The year ended December 31, 2018 included merger and acquisition costs net of tax of $2.7 million. Merger and acquisition costs did not impact earnings per share in 2019. The impact of merger and acquisition costs resulted in a reduction to 2018 earnings per share of approximately $0.49. The Company's ROAA and ROACE were 0.88% and 9.32%  in 2019 compared to 0.70% and 7.53% in 2018.

Management Commentary

On December 31, 2019, the Company issued a total of 312,747 shares of its common stock, par value $0.01 in a private placement offering. The Company received net proceeds of $10.6 million after deal expenses. There were no underwriting discounts or commissions and the majority of the offering participants were accredited investors that were also residents of the communities in the Company's footprint. The Company planned to use the proceeds in part to redeem the Company's outstanding $23.0 million of 6.25% fixed-to-floating rate subordinated notes (the "subordinated notes") that are due on February 15, 2025. On January 14, 2020, the Company received the requisite regulatory non-objection approval to redeem the subordinated notes on February 15, 2020. The Company expects to fund the redemption with the $10.6 million in net proceeds from its private placement offering of common stock and a cash dividend from the Bank.

The community capital raise of $10.6 million in net proceeds was an important step in aligning the Bank's growth plans with local investors, including businesses and customers in our market areas. Redemption of $23.0 million in subordinated notes in February 2020 will positively impact net interest margin and be accretive to earnings. The annualized increase in net interest margin for a $1.4 million reduction in interest expense is estimated between eight and nine basis points.

During the year ended December 31, 2019, the Bank stabilized net interest margin, controlled expenses, organically grew loans and improved credit quality. The second half of 2019 was highlighted with a stable net interest margin due mainly to the Bank's slight liability-sensitivity. There was a small decrease of four basis points from 3.33% in the third quarter of  2019 to 3.29% for the three months ended December 31, 2019. Accretion interest and nonaccrual interest increased net interest margin by four basis points in the third and fourth quarters of 2019. An inverted yield curve as well as strong competition, contributed to net interest margin contraction beginning in the second half of 2018. Overall loan growth for 2019 of 8% was as expected and based on management's evaluation of loan opportunities in light of marginal and total funding costs. 

During the fourth quarter of 2019 the cost of funds decreased at a slightly slower pace than asset repricing. The reduction of the October Fed Funds rate to 1.75% decreased loan yields in the residential loan portfolio due to refinancing activity as well as loan products tied to the prime rate. However, the commercial real estate portfolio, the Bank's largest portfolio, increased from a 4.67% yield in third quarter of 2019 to 4.70% yield in the fourth quarter of 2019. In addition, increased  balance sheet liquidity from seasonal deposit growth during the third quarter of 2019, increased average balances into the fourth quarter, which partially offset a decline in the costs of funds attributable to a reduction in customer deposit rates. Management anticipates a stable to slight increase in net interest margin in the first quarter of 2020 based on decreased interest expense from a reduction in customer deposit rates, the run-off of higher beta seasonal deposits and the redemption of $23.0 million of subordinated notes in February 2020.

The Company improved on-balance sheet liquidity over the last 24 months. Our loan to deposit ratio decreased from 103.1% at December 31, 2017 to 93.5% at December 31, 2018 and 95.6% at December 31, 2019. At the same time, wholesale funding, which includes brokered deposits and Federal Home Loan Bank advances, decreased from $261.9 million or 18.6% of assets at December 31, 2017 to $108.5 million or 6.4% of assets at December 31, 2018 and $46.4 million or 2.6% of assets at December 31, 2019. Increased liquidity provides more opportunities to lower our funding costs over time. 

Overall nonperforming assets have decreased $7.8 million from $34.1 million at December 31, 2018 to $26.3 million at December 31, 2019. Non-accrual loans, OREO and TDRs to total assets decreased 56 basis points to 1.46% at December 31, 2019 compared to 2.02% at December 31, 2018. OREO expenses were slightly elevated during the third and fourth quarters related to a $2.6 million disposal of a commercial building.

Management remains committed to controlling expenses. In the fourth quarter of 2019, the efficiency ratio and net operating expense to average assets were 59.58% and 1.62%, respectively. For the year ended December 31, 2019 the efficiency ratio and net operating expense to average asset ratio were 61.10% and 1.75%, respectively compared to 69.42% and 2.13%, respectively, for the year ended December 31, 2018.

The Company successfully integrated the 2018 County First acquisition into its existing franchise. The Company has returned to trend organic loan growth between 6%-8%. We believe current market disruptions caused by industry consolidation  will provide opportunities for continued organic growth in 2020.

Additional highlights at and for the three months and year ended December 31, 2019 include:

• During the fourth quarter of 2019, gross loans increased 11.0% annualized or $38.8 million from $1,415.4 million at September 30, 2019 to $1,454.2 million at December 31, 2019. Year to date gross loans increased 8.0% or $107.3 million from $1,346.9 million at December 31, 2018 to  $1,454.2 million at December 31, 2019.
  
  
• At December 31, 2019, the Company reclassified all held-to-maturity ("HTM") investments as available-for-sale ("AFS"). The Company no longer intends to hold HTM investments. Management's decision should improve interest rate risk management opportunities and increase available on-balance sheet liquidity. In addition, at the Bank's current asset size, regulatory capital ratios will not be impacted as accumulated other comprehensive income ("AOCI") is excluded.
  
  
• Total deposits increased $82.2 million or 5.75% to $1,511.8 million at December 31, 2019 compared to $1,429.6 million at December 31, 2018. The $82.2 million increase resulted from a $135.1 million increase to transaction deposits and a $52.9 million decrease to time deposits. Noninterest-bearing demand deposits have increased $31.8 million or 15.2% to $241.2 million (16.0% of deposits) at December 31, 2019 compared to $209.4 million (14.7% of deposits) at December 31, 2018.
  
  During the fourth quarter of 2019, total deposits decreased $48.1 million with transaction accounts decreasing $7.6 million and time deposits decreasing $40.6 million. During the third quarter of 2019, the Company estimated that between $30 million and $50 million of the third quarter deposit increases represented seasonal deposits that would decrease through the first quarter of 2020. Management remains focused on changing the Bank's deposit funding mix in favor of lower cost transaction deposits.
  
  
• Net income for the three months ended December 31, 2019 increased $382,000 to $4.1 million, or $0.73 per share, compared to $3.7 million, or $0.66 per share, in the prior quarter. The Company's ROAA and ROACE were 0.91% and 9.58% for the three months ended December 31, 2019 compared to 0.84% and 8.86% in the prior quarter. The Company had no material adjustments to operating net income¹ for the three months ended December 31, 2019 and 2018 and operating earnings per share, operating ROAA and operating ROACE were the same.

The increase in earnings compared to the prior quarter was primarily the result of increased noninterest income for fees earned  and net interest income from a stable net interest margin and interest-earning asset growth. The increase in net interest income was partially offset by increases to the loan loss provision and noninterest expense.

During 2019, the Bank began offering qualified loan customers long-term fixed-rate loans with an interest rate hedge product offered by a third-party financial institution. The Bank earned fee income on this product of $740,000 in the fourth quarter of 2019 and $879,000 for the year ended December 31, 2019. The Company expects similar fee revenues in 2020 based on customer demand and the current interest rate environment.

• Noninterest expense of $9.5 million for the three months ended December 31, 2019 increased $264,000 compared to $9.2 million in the prior quarter. During the fourth quarter of 2019, salaries and benefits increased from the prior quarter due to bonus accruals  for meeting certain incentive goals. The fourth quarter 2019 increase above the projected $9.0 million run rate was primarily due to incentive accruals, higher than average OREO valuation allowances and professional fees. The Company's quarterly expense run rate is expected to range between $9.2 million and $9.4 million during 2020.
  
  The Company took an expected FDIC insurance credit of $170,000 in the fourth quarter of 2019 that offset the fourth quarter accrued FDIC expense.

The following is a summary breakdown of noninterest expenses comparing December 31, 2019 and September 30, 2019:

• The GAAP efficiency ratio was 59.58% for the three months ended December 31, 2019 compared to 62.48% for the three months ended September 30, 2019. The non-GAAP (or "operating") efficiency ratio², which excludes merger and acquisition costs, OREO gains and losses and other non-core activities, was 59.00% for the three months ended December 31, 2019 compared to 60.84% for the three months ended September 30, 2019.
• Operating net income increased $1.4 million or 9.7% to $15.3 million in 2019 compared to $13.9 million in 2018. The Company's operating ROAA and operating ROACE were 0.88% and 9.32% in 2019 compared to 0.87% and 9.33% in 2018. Operating diluted earnings per share were $2.75 and $2.51, 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 margin.

Net Income

The Company reported net income for the three months ended December 31, 2019 of $4.1 million or diluted earnings per share of $0.73 compared to net income for the fourth quarter of 2018 of $3.8 million or a diluted earnings per share of $0.69. The Company's ROAA and ROACE were 0.91% and 9.58% for the three months ended December 31, 2019 compared to 0.93% and 10.01% for the three months ended December 31, 2018.

Net income for the year ended December 31, 2019 was $15.3 million or  $2.75 per diluted share compared to net income of $11.2 million or $2.02 per diluted share for the year ended December 31, 2018. The year ended December 31, 2018 included merger and acquisition costs net of tax of $2.7 million. Merger and acquisition costs did not impact earnings per share in 2019. The impact of merger and acquisition costs resulted in a reduction to 2018 earnings per share of approximately $0.49. The Company's ROAA and ROACE were 0.88% and 9.32%  in 2019 compared to 0.70% and 7.53% in 2018.

The $4.0 million increase to net income in 2019 compared to 2018 was primarily due to increased net interest income and noninterest income of $2.6 million and $1.7 million, respectively, and a decrease in noninterest expense of $1.9 million. In 2018, noninterest expense included $3.6 million related to merger and acquisition costs incurred during 2018. In addition, increased loan loss provisions of $725,000 partially offset pre-tax income for the comparable periods. The improvements to pre-tax income resulted in increased income tax expense of $1.5 million for 2019 compared to 2018.

Net Interest Income

Net interest income increased 6.9% or $888,000 to $13.7 million for the three months ended December 31, 2019 compared to $12.8 million for the three months ended December 31, 2018. Net interest margin at 3.29% for the three months ended December 31, 2019 decreased six basis points from 3.35% in 2018. Average interest-earning assets were $1,666.2 million for the fourth quarter of 2019, an increase of $134.9 million or 8.8%, compared to $1,531.3 million for the same quarter of 2018. Accretion interest and nonaccrual interest increased net interest margin by four basis points and three basis points for the three months ended December 31, 2019 and 2018, respectively. The below table provides information on the impact of changes in volume and rate for the three months ended December 31, 2019 and 2018:

Three Months Ended December 31, 2019 compared to December 31, 2018

(1) Average balance includes non-accrual loans

Net interest income increased 5.2% or $2.6 million to $53.5 million in 2019 compared to $50.9 million in 2018. Net interest margin at 3.31% in 2019 decreased 12 basis points from 3.43% in 2018. Average interest-earning assets were $1,615.6 million for the year ended December 31, 2019, an increase of $132.0 million or 8.9%, compared to $1,483.7 million for the same period of 2018. The below table provides information on the impact of changes in volume and rate for the year ended December 31, 2019 and 2018:

Years Ended December 31, 2019 compared to December 31, 2018

(1) Average balance includes non-accrual loans

Noninterest Income and Noninterest Expenses

Noninterest income at $2.2 million for the three months ended December 31, 2019 increased $1.1 million compared to the three months ended December 31, 2018. The increase was primarily due to increased fee income of $740,000 for  customer interest rate hedges offered by a third-party financial institution, securities gains of $226,000 and increased service charges of $122,000. Noninterest income at $5.8 million in 2019 increased $1.7 million compared to 2018. The increase was primarily due to increased fee income of $879,000 for customer interest rate hedges offered by a third-party financial institution, securities gains of $226,000 and increased service charges of $245,000 and unrealized gains of $134,000  on equity securities in 2019 compared to unrealized losses of $81,000 on equity securities in 2018. Noninterest income increased from 0.25% of average assets in 2018 to 0.33% of average assets in 2019.

Noninterest expense increased $1.2 million or 15.1%, to $9.5 million for the three months ended December 31, 2019 compared to $8.2 million for the three months ended December 31, 2018. The increase in noninterest expense for the comparable periods was primarily due to increased salary and benefits of $775,000 and OREO expenses of $71,000. Operating expenses increased $406,000 for the comparable periods as increases in professional fees and other expenses were offset by an anticipated FDIC insurance credit of $170,000 that was received in the fourth quarter of 2019.

The Company's GAAP efficiency ratio was 59.58% for the three months ended December 31, 2019 compared to 59.33% for the three months ended December 31, 2018. The operating efficiency ratio was 59.00% and 58.30% for the same periods. The Company's GAAP net operating expense ratio was 1.62% for the three months ended December 31, 2019 compared to 1.74% for the three months ended December 31, 2018. The non-GAAP net operating expense ratio was 1.62% and 1.71% for the same periods. The following is a summary of noninterest expense:

Noninterest expense decreased $1.9 million or 5.0%, to $36.2 million in 2019 compared to $38.1 million in 2018, of which $3.6 million of the variance was due to merger and acquisition costs incurred during 2018. 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 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.

Salaries and benefits increased 4.6% or $897,000 to $20.5 million, which was slightly higher that the four percent estimate provided by management during 2019.  Professional fees increased $683,000 to $2.2 million in 2019 compared to $1.5 million in 2018 due to several strategic initiatives, including the implementation of a new bank operating system. The 2019 average quarterly noninterest expense run rate was $9.1 million primarily due to incentive accruals, higher than average OREO valuation allowances and professional fees. The Company's quarterly expense run rate is expected to range between $9.2 million and $9.4 million during 2020.

The Company's GAAP efficiency ratio was 61.10% in 2019 compared to 69.42% in 2018. The operating efficiency ratio was 59.84% and 61.54% for the same periods. The Company's GAAP net operating expense ratio was 1.75% in 2019 compared to 2.13% in 2018. The non-GAAP net operating expense ratio was 1.71% and 1.85% for the same periods. Increased efficiencies from the County First acquisition and  updates to the Bank's technology platforms have allowed the Company to slow the growth of expenses as the asset size of the Bank has increased. In addition, noninterest income increased as a percentage of average assets due to increases in fee income and service charge income. Management believes it is important to continue the focus on creating additional operating leverage in the present low interest rate environment. The following is a summary breakdown of noninterest expense:

Balance Sheet

Total assets increased $108.3 million, or 6.4%, to $1.80 billion at December 31, 2019 compared to total assets of $1.69 billion at December 31, 2018 primarily due to increases in net loans of $108.0 million. In addition, total assets increased $8.4 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. The Company's loan pipeline was approximately $104.0 million at December 31, 2019. The following tables breakdown growth for the three months ended December 31, 2019 and for the year ended December 31, 2019 by portfolio:

The acquisition of County First and 2018 and 2019 organic loan growth  have changed the composition of the loan portfolios.  The growth in the commercial real estate and commercial portfolios should increase asset sensitivity over time. Commercial real estate increased from 63.25% of gross loans at December 31, 2017 to 66.34% at December 31, 2019. Acquired and non-acquired loans at December 31, 2019 and December 31, 2018 were as follows:

** Non-acquired loans include loans transferred from acquired pools following release of acquisition accounting FMV adjustments.

At December 31, 2019 acquired performing loans, which totaled $74.7 million, included a $1.2 million net acquisition accounting fair market value adjustment, representing a 1.56% discount and PCI loans which totaled $2.4 million, included a $516,000 adjustment, representing a 17.55% discount.

Regulatory concentrations for non-owner occupied commercial real estate and construction as a percentage of risk-based capital at December 31, 2019 were $639.1 million or 319.98% and $147.2 million or 73.68%, respectively. 

Total deposits increased $82.2 million or 5.75% to $1,511.8 million at December 31, 2019 compared to $1,429.6 million at December 31, 2018. The $82.2 million increase resulted from a $135.1 million increase in transaction deposits and a $52.9 million decrease in time deposits. Noninterest-bearing demand deposits have increased $31.8 million or 15.19% to $241.2 million (15.95% of deposits) at December 31, 2019 compared to $209.4 million (14.65% of deposits) at December 31, 2018.

Reciprocal deposits are used to maximize FDIC insurance available to our customers. Under the Federal Deposit Insurance Act reciprocal deposits are considered brokered deposits when they exceed 20% of a Bank's liabilities or $5.0 billion. Reciprocal deposits increased $115.1 million to $350.0 million at December 31, 2019 compared to $234.9 million at December 31, 2018. Reciprocal deposits as a percentage of the Bank's liabilities at December 31, 2019 were 22.0% and as a result $31.4 million of reciprocal deposits were considered brokered deposits for call reporting purposes.

At December 31, 2019 and December 31, 2018, total deposits consisted of $1,510.8 million and $1,376.5 million in retail deposits and $1.0 million and $53.1 million in wholesale brokered deposits. Wholesale brokered deposits include traditional brokered deposits and do not include reciprocal deposits considered brokered deposits for call reporting purposes. The Bank increased retail deposits $389.3 million or 39.4% during 2018 to $1,376.5 million at December 31, 2018  and $134.3 million or 9.8% during 2019 to $1,510.8 million at December 31, 2019. The retail deposit growth was as a result of the acquisition of County First in 2018, targeted growth in relationships with local municipal agencies and continued organic growth in core markets.

The FDIC's examination policies require that the Company monitor customer deposit concentrations that are 2% or more of total deposits. At December 31, 2019, the Bank had two local municipal customer deposit relationships that exceeded 2% of total deposits, totaling $297.1 million which represented 19.6% of total deposits. At December 31, 2018,  one local municipal customer deposit relationship exceeded 2% of total deposits, totaling $158.8 million which represented 11.1% of total deposits. The Bank's municipal customers typically utilize treasury and cash management services involving multiple accounts as well as other services and products such as payroll, lock box services, positive pay, and automated clearing house transactions. Most of the municipal relationships' balances are maintained in reciprocal deposits. Management believes that the diversity and complexity of products and services utilized, safeguards the stability of these relationships. The Bank's Asset and Liability Management process closely monitors municipal deposit concentrations to manage the impact of seasonal balance fluctuations.

At December 31, 2019, the Company had on-balance sheet liquidity of $37.3 million in cash and cash equivalents, and equity securities carried at fair value through income as well as $153.5 million in unpledged AFS securities. The Company had $216.3 million in available FHLB lines at December 31, 2019, which does not include any AFS securities. At December 31, 2019, total available collateral for FHLB borrowing was $369.8 million and total available FHLB collateral and cash was $407.1 million.

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 2.58% or $46.4 million at December 31, 2019 compared to 6.43% or $108.5 million at December 31, 2018.  Wholesale funding includes traditional brokered deposits and Federal Home Loan Bank ("FHLB") advances. Wholesale funding has decreased from 18.63% at December 31, 2017. Liquidity improved with the increase in transaction deposits from the 2018 acquisition, organic growth and the decrease in wholesale funding. The Company's net loan to deposit ratio decreased from 103.1% at December 31, 2017 to 93.5% at December 31, 2018 and to 95.6% at December 31, 2019.

Total stockholders' equity increased $27.0 million, or 17.5%, to $181.5 million at December 31, 2019 compared to $154.5 million at December 31, 2018. This increase primarily resulted from net income of $15.3 million,  the $10.6 million private placement common stock offering, an increase in accumulated other comprehensive income of $3.4 million and net stock related activities in connection with stock-based compensation and ESOP activity of $442,000. These increases to stockholders' equity were partially offset by decreases due to common dividends paid of $2.7 million, and repurchases of common stock of $17,000. The Company increased its quarterly dividend from $0.10 in 2018 to $0.125 for dividends paid during 2019. The Company's ratio of tangible common equity to tangible assets increased to 9.44% at December 31, 2019 from 8.41% at December 31, 2018³. The Company's Common Equity Tier 1 ("CET1") ratio was 11.11% at December 31, 2019 and 10.36% at  December 31, 2018. The Company remains well capitalized at December 31, 2019 with a Tier 1 capital to average assets (leverage ratio) of 10.08% at December 31, 2019 compared to 9.50% at December 31, 2018.

Asset Quality

Non-accrual loans and OREO to total assets decreased 19 basis points from 1.62% at December 31, 2018 to 1.43% at December 31, 2019. Non-accrual loans, OREO and TDRs to total assets decreased 56 basis points from 2.02% at December 31, 2018 to 1.46% at December 31, 2019.

Non-accrual loans decreased $1.4 million from $19.3 million at December 31, 2018 to $17.9 million at December 31, 2019. The decrease in non-accrual loans during 2019 was largely the result of a $3.8 million 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 the first quarter of 2019. Non-accrual loans increased $2.5 million during the fourth quarter of 2019 from $15.4 million at September 30, 2019 compared to $17.9 million at December 31, 2019.

At December 31, 2019, non-accrual loans of $17.9 million included 39 loans, of which $15.0 million, or 84% represented 18 loans and seven customer relationships. At December 31, 2019, there were $5.1 million (28%) of non-accrual loans current with all payments of principal and interest and $12.8 million (72%) of delinquent non-accrual loans. Non-accrual loans had $732,000 in specific reserves at December 31, 2019. At December 31, 2018, non-accrual loans of $19.3 million included 38 loans, of which $15.3 million, or 79% represented 13 loans and four customer relationships. At December 31, 2018, there were $8.1 million (42%) of non-accrual loans current with all payments of principal and interest with no impairment and $11.2 million (58%) of delinquent non-accrual loans with a total of $978,000 specifically reserved.

Classified assets decreased $6.2 million from $40.8 million at December 31, 2018 to $34.6 million at December 31, 2019. 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 December 31, 2019, 2018, 2017, 2016 and 2015, respectively:

Classified Assets and Special Mention Assets

(a) Risk based capital will decrease in the first quarter of 2020 with the redemption of the $23.0 million in subordinated notes. If the redemption had occurred at December 31, 2019, the ratio would have been 18.17%.

The Company reported a $805,000 provision for loan loss expense for the three months ended December 31, 2019 compared to $465,000 for the three months ended December 31, 2018. The provision for loan loss in 2019 was $2.1 million compared to $1.4 million in 2018. Allowance for loan loss levels decreased to 0.75% of total loans at December 31, 2019 compared to 0.81% at December 31, 2018. The general allowance increased to $10.1 million (0.70% of gross loans) at December 31, 2019 from $9.8 million (0.73% of gross loans) at December 31, 2018. The specific allowance decreased to $828,000 (0.05% of gross loans) at December 31, 2019 from $1.2 million (0.08% of gross loans) at December 31, 2018.

Net charge-offs in 2019 were $2.2 million compared to net charge-offs of $944,000 in 2018. 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 $1.9 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, noninterest 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 December 31, 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

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED)
CONDENSED CONSOLIDATED INCOME STATEMENT

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
CONDENSED CONSOLIDATED BALANCE SHEETS

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
SELECTED FINANCIAL INFORMATION AND RATIOS

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
SELECTED FINANCIAL INFORMATION AND RATIOS

** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.

(1) Delinquency excludes Purchase Credit Impaired ("PCI") loans.
(2) 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. At September 30, 2019 and December 31, 2018, the Company had current non-accrual loans of $3.7 million and $8.1 million, respectively.

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL QUARTERLY FINANCIAL DATA (UNAUDITED) - Continued
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL MEASURES

This press release, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with generally accepted accounting principles, or GAAP. This financial information includes certain operating performance measures, which exclude merger and acquisition costs, OREO gains and losses and OREO expenses, and gains and losses on sales of investments or other assets, that are not considered part of recurring operations. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL YEAR TO DATE FINANCIAL DATA (UNAUDITED)
CONDENSED CONSOLIDATED INCOME STATEMENT

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL YEAR TO DATE FINANCIAL DATA (UNAUDITED)

** Non-GAAP financial measure. See reconciliation of GAAP and NON-GAAP measures.

THE COMMUNITY FINANCIAL CORPORATION
SUPPLEMENTAL YEAR TO DATE FINANCIAL DATA (UNAUDITED)
RECONCILIATION OF GAAP AND NON-GAAP FINANCIAL MEASURES

This press release, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with generally accepted accounting principles, or GAAP. This financial information includes certain operating performance measures, which exclude merger and acquisition costs, OREO gains and losses and OREO expenses, and gains and losses on sales of investments or other assets, that are not considered part of recurring operations. These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.

THE COMMUNITY FINANCIAL CORPORATION
RECONCILIATION OF NON-GAAP MEASURES THREE MONTHS ENDED (UNAUDITED)

Reconciliation of US GAAP Net Income, Earnings Per Share (EPS), Return on Average Assets (ROAA) and Return on Average Common Equity  (ROACE) to Non-GAAP Operating Net Income, EPS, ROAA and ROACE

This press release, including the accompanying financial statement tables, contains financial information determined by methods other than in accordance with generally accepted accounting principles, or GAAP. This financial information includes certain operating performance measures, which exclude merger and acquisition costs and the fourth quarter 2017  income tax expense attributable to the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate under the recently enacted Tax Cuts and Jobs Act. These expenses are not considered part of recurring operations, such as "operating net income,"  "operating earnings per share," "operating return on average assets," and "operating return on average common equity." These non-GAAP measures are included because the Company believes they may provide useful supplemental information for evaluating the underlying performance trends of the Company.