The Community Financial Corporation Announces Results of Operations for First Quarter of 2016

WALDORF, Md., April 25, 2016 /PRNewswire/ -- 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 three months ended March 31, 2016. Consolidated net income available to common shareholders of $1.6 million or $0.35 per common share (diluted) for the three months ended March 31, 2016 increased $80,000 or $0.02 per common share (diluted) compared to the three months ended December 31, 2015. The Company increased income before income taxes $237,000 to $2.6 million for the three months ended March 31, 2016 from $2.4 million for the three months ended December 31, 2015.

Consolidated net income available to common shareholders of $1.6 million for the three months ended March 31, 2016 decreased $190,000 compared to the three months ended March 31, 2015. Earnings per common share (diluted) at $0.35 decreased $0.03 from $0.38 per common share (diluted) for the three months ended March 31, 2015. Consolidated net income reflects the stability of core earnings while absorbing the impact of the 2015 subordinated debt offering that replaced SBLF preferred stock.

"In our first quarter, loan growth was strong.  Average loans outstanding grew by over $30 million in the most recent quarter, and we are expecting the second quarter to be robust as well," stated William J. Pasenelli, President and Chief Executive Officer. "Due to the continuing low interest rates and the effects on net interest margin, we are focusing on restructuring our operations to reduce costs. In the first quarter of 2016, we completed a redesign of the entire branch system. This redesign, combined with the closure of our King George facility allowed us to reduce branch employees by 15% from 73 at March 31, 2015 to 62 at March 31, 2016. This was accomplished while preparing to open our downtown Fredericksburg location. We believe that the branch redesign preserves the high touch character of our customer experience while reducing costs. In 2016, the company will extend this level of review to other areas. To date, annualized savings of $1.2 million have been targeted, which should be realized over the next four quarters. We are continuing to review operations for other efficiencies. In addition to reducing expenses, earning asset growth, primarily in loans, will add to our operating leverage."

"Underpinning the stable core earnings is our strong loan growth and pipeline. In light of the continued low interest rate environment and dramatic shifts in customer banking habits through technology driven channels, management has proactively been reconfiguring the delivery systems over the last two years. This drives the efficiency of our customer service while providing enhanced services and products," stated Michael L. Middleton, Executive Chairman. 

Operations – Three Months Ended March 31, 2016 compared to Three Months Ended December 31, 2015

Consolidated net income available to common shareholders of $1.6 million for the three months ended March 31, 2016 increased $80,000 compared to the three months ended December 31, 2015. This is attributable to increased net interest income of $45,000 and a reduction in noninterest expense of $316,000. These increases to net income were partially offset by an increase in the provision for loan losses of $65,000, decreased noninterest income of $59,000 and increased income tax expense of $157,000.

Net interest income increased $45,000 to $9.4 million for the three months ended March 31, 2016 compared to $9.3 million for the three months ended December 31, 2015. Net interest margin at 3.50% for the three months ended March 31, 2016 decreased 11 basis points from 3.61% for the three months ended December 31, 2015. The decrease in net interest margin from the prior quarter was the result of lower yields on loans and slightly higher cost and larger average balances on interest-bearing liabilities. The fourth quarter of 2015 had several loans positively impact net interest margin by returning to performing status from nonaccrual. This resulted in an increase of five basis points on net interest margin during the fourth quarter of 2015. The adjusted net interest margin would have been 3.56% for the fourth quarter of 2015. The Company's first quarter 2016 yields on loans and interest-earning assets were in line with management expectations. The Company expects slight net interest margin compression during the second quarter of 2016 based on its pipeline and plans to add additional residential mortgages and investments.

During the three months ended March 31, 2016, the Company's cost of funds was positively impacted by continuing to add transaction deposits and decreased by one basis point to 0.73% compared to 0.74% for the fourth quarter of 2015. Average transaction deposits, which include savings, money market, interest-bearing demand and non-interest bearing demand accounts, for the three months ended March 31, 2016 increased $11.1 million or 2.2% to $526.5 million compared to $515.4 million for the three months ended December 31, 2015. Average non-interest-bearing demand deposits increased $2.2 million to $133.0 million compared to the prior quarter.

Medium-term interest rates have fallen since the fourth quarter of 2015, with the ten year U.S. Treasury rate as of April 20, 2016 ending at 1.85%. This is down from 2.27% at December 31, 2015 and 2.17% at December 31, 2014.  The five year U.S. Treasury rate as of April 20, 2016 was 1.32%. This is down from 1.76% at December 31, 2015 and 1.65% at December 31, 2014. These lower medium-term interest rates are due to economic weaknesses in the world economy. If treasury rates remain depressed in the 5 to 10 year range it will have a negative impact on the re-pricing of the loan portfolio and the pricing of new loans. The downward pressure on treasury rates had a positive impact on local deposit pricing through the first quarter of 2016. 

Interest and dividend income increased by $104,000 to $11.3 million for the three months ended March 31, 2016 compared to $11.2 million for the three months ended December 31, 2015, primarily due to increased income from the growth in the average balance of loans and investments and increased investment yields partially offset by lower yields on loans. Interest income on loans increased $347,000 due to growth of $30.3 million in the average balance of loans from $888.8 million for the three months ended December 31, 2015 to $919.1 million for the three months ended March 31, 2016. Interest and dividend income on investments increased $59,000 during the first quarter of 2016 compared to the prior quarter as average interest-earning investment balances increased $6.6 million and average yields increased from 1.91% to 1.98%. Average loan yields declined 14 basis points from 4.73% for the three months ended December 31, 2015 to 4.59% for the three months ended March 31, 2016, which resulted in a decrease in interest income of $302,000. The decrease in loan yields compared to the prior quarter was impacted the most by the change in commercial real estate loan yields which decreased from 4.59% for the three months ended December 31, 2015 to 4.52% for the three months ended March 31, 2016. The balance of the impact was $118,000 of additional interest that was recognized in the fourth quarter of 2015 for loans that returned to performing status from nonaccrual which was primarily in the commercial loan portfolio.

Interest expense increased $59,000 to $1.9 million for the three months ended March 31, 2016 compared to the prior quarter due to an increase in the average balances of interest-bearing liabilities. During the three months ended March 31, 2016, interest expense increased $68,000 due to increased average balances of interest-bearing transaction deposit accounts, time deposits and short-term debt compared to the prior quarter. Debt costs increased $69,000 due to increased rates on long-term debt and short-term borrowings.  The average rate paid on debt, which includes long-term debt, trust preferred junior subordinated debentures ("TRUPS"), subordinated notes, and short-term borrowings, declined from 2.78% for the three months ended December 31, 2015 to 2.71% for the three months ended March 31, 2016. The seven basis point decline in debt costs was due to the Company utilizing more short-term debt to finance operations during the first quarter of 2016 as long-term debt matured. These increases to interest expense were partially offset by a reduction in interest expense of $67,000 due to a $10.1 million decrease in average long-term debt balances from $62.0 million in the fourth quarter of 2015 to $51.9 million for the three months ended March 31, 2016. Additionally, interest expense decreased $11,000 as rates on interest-bearing deposit accounts decreased modestly from 0.56% to 0.55%.

The provision for loan losses increased $65,000 to $427,000 for the three months ended March 31, 2016 compared to $362,000 for the three months ended December 31, 2015. Net charge-offs for the current quarter increased $180,000 from $197,000 for the three months ended December 31, 2015 to $377,000 for the three months ended March 31, 2016. Improvements to baseline charge-off factors for the periods used to evaluate the adequacy of the allowance as well as improvements in some qualitative factors, such as reductions in classified assets and delinquency, were offset by increases in other qualitative factors, such as loan growth. The improvement in the base-line charge-off factors reflects more favorable loan loss experience during the five-year period ended March 31, 2016 than for the comparable period ended. Overall, these changes resulted in a higher provision for loan losses for the comparable periods. The specific allowance is based on management's estimate of realizable value for particular loans and has decreased as specific credits have been resolved through a return to performance, charge-offs and additions to other real estate owned.

Noninterest income decreased by $59,000 to $850,000 for the three months ended March 31, 2016 compared to $909,000 for the three months ended December 31, 2015 due to a small decrease in miscellaneous and loan fees compared to the prior quarter. Service charge income and income from bank owned life insurance were comparable to the prior period.

Noninterest expense of $7.2 million for the first quarter of 2016 decreased $316,000 from the fourth quarter of 2015. The current quarter decrease was primarily the result of a one-time a $200,000 expense that occurred in the fourth quarter of 2015 to reduce an insurance settlement claim receivable. The Company's noninterest expense, excluding OREO charges, was $6.9 million for the first quarter of 2016. The Company's average noninterest expense per quarter, excluding OREO charges and the settlement claim, was $6.8 million per quarter for the year ended December 31, 2015. In 2015, the Company incurred non-recurring expenses related to the initial implementation of risk management programs. During 2016, the Company is focused on reducing expenses by decreasing FTEs, reviewing vendor relationships and streamlining internal processes. The Company is cautiously optimistic that these cost cutting efforts and our continued asset growth will create operating leverage and increase both our return on average assets and return on equity over the next four quarters. The following is a summary breakdown of noninterest expense compared to the prior quarter:

 



Three Months Ended





(dollars in thousands)


March 31, 2016


December 31, 2015


$ Change


% Change

Compensation and Benefits


$                    4,152


$                    4,148


$                      4


0.1%

OREO Valuation Allowance and Expenses


301


377


(76)


(20.2%)

Other Operating Expenses


2,787


3,031


(244)


(8.1%)

Total Noninterest Expense


$                    7,240


$                    7,556


$                (316)


(4.2%)










 

Operations – Three Months Ended March 31, 2016 compared to Three Months Ended March 31, 2015

Consolidated net income available to common shareholders of $1.6 million for the three months ended March 31, 2016 decreased $190,000 compared to the three months ended March 31, 2015. This is primarily attributable to an increase in the provision for loan losses of $249,000, increased noninterest expense of $297,000 and decreased noninterest income of $112,000. These decreases to net income were partially offset by increased net interest income of $330,000, decreased income tax expense of $115,000 and decreased preferred stock dividends of $23,000.

Net interest income increased $330,000 to $9.4 million for the three months ended March 31, 2016 compared to $9.1 million for the three months ended March 31, 2015. The net interest margin was 3.50% for the three months ended March 31, 2016, a 17 basis point decrease from 3.67% for the three months ended March 31, 2015. The decrease in net interest margin was largely the result of lower yields on loans, slightly higher funding costs and a full quarter of interest expense in the three months ended March 31, 2016 on the $23.0 million 6.25% subordinated notes issued during February 2015.

Interest and dividend income increased by $584,000 to $11.3 million for the three months ended March 31, 2016 compared to $10.7 million for the three months ended March 31, 2015, primarily due to increased income from the growth in the average balance of loans and investments and increased investment yields. Interest and dividend income on loans increased $759,000 due to growth of $66.2 million in the average balance of loans from $852.9 million for the three months ended March 31, 2015 to $919.1 million for the three months ended March 31, 2016. Interest and dividend income on investments increased $216,000 during the first quarter of 2016 compared to the same period in the prior year as average interest-earning investment balances increased $21.2 million and average yields increased from 1.65% to 1.98%. Average loan yields declined 18 basis points from 4.77% for the three months ended March 31, 2015 to 4.59% for the three months ended March 31, 2016, which resulted in a decrease in interest and dividend income of $391,000.

Interest expense increased $254,000 to $1.9 million for the three months ended March 31, 2016 compared to $1.7 million for the three months ended March 31, 2015, due to both an increase in the average balances of interest-bearing liabilities and a slight increase in funding costs.  During the three months ended March 31, 2016, interest expense increased $144,000 due to the larger first quarter 2016 average balance of the subordinated notes issued in February 20015, and $93,000 due to increased average balances of interest-bearing transaction deposit accounts, time deposits and short-term debt compared to the same quarter of 2015. Additionally, interest expense increased $39,000 as rates on interest-bearing deposit accounts increased modestly from 0.54% to 0.55%. Debt costs increased $115,000 as the average rate paid on debt, which includes long-term debt, trust preferred junior subordinated debentures ("TRUPS"), subordinated notes, and short-term borrowings, increased from 2.45% for the three months ended March 31, 2015 to 2.71% for the comparable period in 2016. Interest expense for the three months ended March 31, 2016 were $156,000 greater than the comparable period as a result of the timing of the funding of the subordinated notes in February 2015. These increases to interest expense were partially offset by a reduction in interest expense of $137,000 due to a $20.6 million decrease in average long-term debt balances from the comparable period to $51.9 million for the three months ended March 31, 2016.

The Company continued to make progress in controlling overall deposit costs by increasing transaction deposits as a percentage of overall deposits. Average transaction accounts as a percentage of average total deposits increased from 54.7% for the three months ended March 31, 2015 to 57.0% for the three months ended March 31, 2016. Deposit costs at 0.47% were the same for the three months ended March 31, 2016 and 2015, respectively. Average transaction deposits, which include savings, money market, interest-bearing demand and noninterest bearing demand accounts, for the three months ended March 31, 2016 increased $67.8 million or 14.8% to $526.5 million compared to $458.7 million for the comparable period in 2015. The increase in average transaction deposits included growth in average noninterest bearing demand deposits of $21.0 million from $112.0 million for the three months ended March 31, 2015 to $133.0 million for the three months ended March 31, 2016.

The provision for loan losses increased $249,000 to $427,000 for the three months ended March 31, 2016 compared to $178,000 for the three months ended March 31, 2015. Net charge-offs for the quarter increased $339,000 from $38,000 for the three months ended March 31, 2015 to $377,000 for the three months ended March 31, 2016. Improvements to baseline charge-off factors for the periods used to evaluate the adequacy of the allowance as well as improvements in some qualitative factors, such as reductions in classified assets and delinquency, were offset by increases in other qualitative factors, such as loan growth. The improvement in the base-line charge-off factors reflects more favorable loan loss experience during the five-year period ended March 31, 2016 than for the comparable period ended. Overall, these changes resulted in a higher provision for loan losses for the comparable periods. The specific allowance is based on management's estimate of realizable value for particular loans and has decreased as specific credits have been resolved through a return to performance, charge-offs and additions to other real estate owned.

Noninterest income decreased by $112,000 to $850,000 for the three months ended March 31, 2016 compared to $962,000 for the three months ended March 31, 2015, primarily due to the Company's exit from residential loan originations during the second quarter of 2015. As a result, there were no gains on residential loans held for sale in the three months ended March 31, 2016 compared to $97,000 in the first quarter of 2015. Additionally, there were moderate decreases in the first quarter of 2016 in bank owned life insurance income compared to the prior year period.

For the three months ended March 31, 2016, noninterest expense increased 4.3%, or $297,000, to $7.2 million from $6.9 million for the comparable period in 2015. The Company's 2015 total growth in salary and benefit costs was 3.2%. During 2015, the Company controlled the growth of salary and benefit costs by significantly restructuring our branch organization and better aligning incentives with Company performance. The Company's noninterest expense as a percentage of average assets for the three months ended March 31, 2016 and 2015 were 2.51% and 2.61%, respectively. The following is a summary breakdown of noninterest expense:

 












Three Months Ended March 31,





(dollars in thousands)


2016


2015


$ Change


% Change

Compensation and Benefits


$                    4,152


$                    4,145


$                      7


0.2%

OREO Valuation Allowance and Expenses


301


219


82


37.4%

Other Operating Expenses


2,787


2,579


208


8.1%

Total Noninterest Expense


$                    7,240


$                    6,943


$                  297


4.3%










 

Financial Condition at March 31, 2016 compared to December 31, 2015

Total assets at March 31, 2016 of $1.18 billion increased $33.6 million compared to total assets of $1.14 billion at December 31, 2015. The increase in total assets was primarily attributable to growth in securities and loans. Net loans increased $26.3 million from $909.2 million at December 31, 2015 to $935.5 million at March 31, 2016, mainly due to increases in loans for commercial real estate and residential first mortgages. The following is a breakdown of the Company's loan portfolio at March 31, 2016 and December 31, 2015:

 










(dollars in thousands)


March 31, 2016


%


December 31, 2015


%










Commercial real estate


$                  643,977


68.14%


$                  613,479


66.76%

Residential first mortgages


155,532


16.46%


149,967


16.32%

Construction and land development


38,687


4.09%


36,189


3.94%

Home equity and second mortgages


21,019


2.22%


21,716


2.36%

Commercial loans


54,220


5.74%


67,246


7.32%

Consumer loans


330


0.03%


366


0.04%

Commercial equipment 


31,379


3.32%


29,931


3.26%



945,144


100.00%


918,894


100.00%

Less:









   Deferred loan fees


1,054


0.11%


1,154


0.13%

   Allowance for loan losses


8,591


0.91%


8,540


0.93%



9,645




9,694





$                  935,499




$                  909,200



 

The Company has been working to reduce classified loans by using approaches that maximize the Company's contractual rights with each individual customer relationship. 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 classified customers to obtain financing with other lenders or enforcing its contractual rights. Management believes this strategy is in the best long-term interest of the Company.  

Management considers classified assets to be an important measure of asset quality. Classified assets have been trending downward the last several years as a percentage of total assets and risk-based regulatory capital and in total dollars from a high point of greater than $81.9 million at September 30, 2011. During the fourth quarter of 2015, the Company reduced classified loans $3.5 million to $32.8 million. Of the fourth quarter 2015 reduction in classified loans, $2.7 million was transferred to OREO. These properties include a 21 unit apartment building, 11 condo units and a commercial property. The Company is optimistic that these properties will be sold in the near term based on the current valuation, the existing market and tenant occupancy. During the three months ended March 31, 2016, the Company took a deed in lieu of foreclosure on a $2.1 million improved commercial office building with multiple tenants. This property was taken into OREO at the carrying value of the loan and is presently under contract in the feasibility study period. There is no expected loss from the disposal of this property. The following is a breakdown of the Company's classified and special mention assets at March 31, 2016 and December 31, 2015, 2014, 2013, 2012 and 2011, respectively:

Classified Assets and Special Mention Assets







(dollars in thousands)


As of
March 31, 2016


As of
December 31, 2015


As of
December 31, 2014


As of
December 31, 2013


As of
December 31, 2012


As of
December 31, 2011

Classified loans













   Substandard


$                 31,944


$                 31,943


$                 46,735


$                 47,645


$                 48,676


$                 68,515

   Doubtful


502


861


-


-


-


-

   Loss


-


-


-


-


-


37

Total classified loans


32,446


32,804


46,735


47,645


48,676


68,552

Special mention loans


-


1,642


5,460


9,246


6,092


-

Total classified and special mention loans


$                 32,446


$                 34,446


$                52,195


$                 56,891


$                 54,768


$                 68,552














Classified loans


32,446


32,804


46,735


47,645


48,676


68,552

Classified securities


1,028


1,093


1,404


2,438


3,028


6,057

Other real estate owned


11,038


9,449


5,883


6,797


6,891


5,029

Total classified assets


$                 44,512


$                 43,346


$                  54,022


$                  56,880


$                  58,595


$                  79,638














Total classified assets as a
   percentage of total assets


3.89%


3.79%


4.99%


5.56%


5.97%


8.10%

Total classified assets as a
   percentage of Risk Based Capital


30.79%


30.19%


39.30%


43.11%


59.02%


83.89%



























 

Non-accrual loans (90 days or greater delinquent and non-accrual only loans) decreased $1.0 million from $11.4 million or 1.24% of total loans at December 31, 2015 to $10.4 million or 1.10% of total loans at March 31, 2016. Non-accrual only loans are loans classified as non-accrual due to customer operating results or payment history. In accordance with the Company's policy, interest income is recognized on a cash basis for these loans. The Company had 30 non-accrual loans at March 31, 2016 compared to 38 non-accrual loans at December 31, 2015. Non-accrual loans at March 31, 2016 included $7.6 million, or 75% of non-accrual loans, attributed to 17 loans representing six customer relationships classified as substandard. Non-accrual loans at December 31, 2015 included $8.1 million, or 71% of non-accrual loans, attributed to 19 loans representing six customer relationships classified as substandard. Of these loans at March 31, 2016 and December 31, 2015, $3.5 million and $3.8 million, respectively, represented a residential development project. During the second quarter of 2014, the Company deferred the collection of principal and interest on this project. The project is currently being built out with the support of private equity funds which have been used for vertical construction that has significantly improved the collateral value and the viability of the project. The Company's loans remain as troubled debt restructures ("TDRs") and non-accrual. In addition, at March 31, 2016 and December 31, 2015, the Company had three TDR loans totaling $1.6 million and $1.7 million, respectively, classified as non-accrual. These loans are classified solely as non-accrual loans for the calculation of financial ratios.

Loan delinquency (90 days or greater delinquent and 31-89 days delinquent) decreased $1.0 million from $11.7 million, or 1.27% of loans, at December 31, 2015 to $10.7 million, or 1.13% of loans, at March 31, 2016.  Loans 31-89 days delinquent increased $35,000 from $948,000, or 0.10% of total loans, at December 31, 2015 to $983,000, or 0.10% of total loans, at March 31, 2016.

At March 31, 2016, the Company had 20 accruing TDRs totaling $12.3 million compared to 23 accruing TDRs totaling $13.1 million as of December 31, 2015. The Company had specific reserves of $1.0 million on seven TDRs totaling $3.3 million at March 31, 2016 and specific reserves of $1.3 million on nine TDRs totaling $3.6 million at December 31, 2015.

The following is a breakdown by loan classification of the Company's TDRs at March 31, 2016 and December 31, 2015:



March 31, 2016


December 31, 2015

(dollars in thousands)


Dollars 


Number
 of Loans


Dollars 


Number
 of Loans










Commercial real estate


$             11,395


11


$             11,897


13

Residential first mortgages


562


2


881


3

Construction and land development


4,211


4


4,283


5

Commercial loans


1,149


6


1,384


7

Commercial equipment


121


2


123


2

Total TDRs


$             17,438


25


$             18,568


30

Less: TDRs included in non-accrual loans


(5,111)


(5)


(5,435)


(7)

Total accrual TDR loans


$             12,327


20


$             13,133


23



















 

The OREO balance was $11.0 million at March 31, 2016, an increase of $1.6 million compared to $9.4 million at December 31, 2015. This increase consisted of additions of $2.5 million offset by valuation allowances of $255,000 to adjust properties to current appraised values and $671,000 in disposals. OREO carrying amounts reflect management's estimate of the realizable value of these properties incorporating current appraised values, local real estate market conditions and related costs.

Non-accrual loans and OREO to total assets decreased one basis point from 1.83% at December 31, 2015 to 1.82% at March 31, 2016.  Non-accrual loans, OREO and TDRs to total assets decreased 11 basis points from 2.98% at December 31, 2015 to 2.87% at March 31, 2016.

The allowance for loan losses was 0.91% of gross loans at March 31, 2016 and 0.93% at December 31, 2015. There was an increase in the general component of the allowance due to changes to general allowance factors that reflect changes in historical loss, delinquency rates and general economic conditions. Management's determination of the adequacy of the allowance is based on a periodic evaluation of the portfolio with consideration given to: overall loss experience; current economic conditions; size, growth and composition of the loan portfolio; financial condition of the borrowers; current appraised values of underlying collateral and other relevant factors that, in management's judgment, warrant recognition in determining an adequate allowance. Improvements to baseline charge-off factors for the periods used to evaluate the adequacy of the allowance as well as improvements in some qualitative factors, such as reductions in classified assets and delinquency, were offset by increases in other qualitative factors, such as loan growth. The specific allowance is based on management's estimate of realizable value for particular loans. Management believes that the allowance is adequate. The Company increased its general allowance as a percentage of gross loans two basis points from 0.75% at December 31, 2015 to 0.77% at March 31, 2016. The following is a breakdown of the Company's general and specific allowances as a percentage of gross loans at March 31, 2016 and December 31, 2015, respectively.









(dollar in thousands)

March 31, 2016


% of Gross
Loans


December 31, 2015


% of Gross
Loans









General Allowance

$                        7,303


0.77%


$                        6,932


0.75%

Specific Allowance

1,288


0.14%


1,608


0.17%

Total Allowance

$                        8,591


0.91%


$                        8,540


0.93%









 

The most important weighted factor in the Company's allowance for loan loss methodology is the charge-off history of the loan portfolio. The historical loss experience factor is tracked over various time horizons for each portfolio segment. It is weighted as the most important factor of the general component of the allowance and has decreased as the Company's charge-off history has improved. The following table provides a five-year trend of net charge-offs as a percentage of average loans.


















Three Months Ended March 31,


Years Ended December 31,

(dollars in thousands)


2016


2015


2015


2014


2013


2012


2011

Average loans


$                919,058


$                852,911


$    874,186


$    819,381


$    741,369


$    719,798


$    671,242

Net charge-offs


377


38


1,374


2,309


1,049


1,937


4,101

Net charge-offs
    to average loans


0.16%


0.02%


0.16%


0.28%


0.14%


0.27%


0.61%































 

Deposits increased by 4.8%, or $43.7 million to $950.6 million at March 31, 2016 compared to $906.9 million at December 31, 2015. Between 2012 and 2016, the Company increased transaction deposits, including noninterest bearing deposits, to lower its overall cost of funds. Average transaction deposits increased $11.1 million to $526.5 million during the first quarter of 2016 compared to the fourth quarter of 2015. Transaction deposits have increased from 44.9% of total deposits at December 31, 2011 to 57.1% of total deposits at March 31, 2016. Details of the Company's deposit portfolio at March 31, 2016 and December 31, 2015 are presented below:













March 31, 2016


December 31, 2015


(dollars in thousands)


Balance


%


Balance


%


Noninterest-bearing demand


$                137,312


14.44%


$                142,771


15.74%


Interest-bearing:










Demand


126,460


13.30%


120,918


13.33%


Money market deposits


232,024


24.41%


219,956


24.25%


Savings


47,304


4.98%


47,703


5.26%


Certificates of deposit


407,499


42.87%


375,551


41.41%


Total interest-bearing


813,287


85.56%


764,128


84.26%












Total Deposits


$                950,599


100.00%


$                906,899


100.00%












Transaction accounts


$                543,100


57.13%


$                531,348


58.59%






















 

The Company uses both traditional brokered deposits and reciprocal brokered deposits. Traditional brokered deposits at March 31, 2016 and December 31, 2015 were $94.6 million and $49.1 million, respectively. Reciprocal brokered deposits at March 31, 2016 and December 31, 2015 were $54.6 million and $61.1 million, respectively. The reciprocal brokered deposits have many characteristics of core deposits and are used to maximize FDIC insurance available to our customers.

Long-term debt and short-term borrowings decreased $10.5 million from $91.6 million at December 31, 2015 to $81.1 million at March 31, 2016. 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 three months ended March 31, 2016, stockholders' equity increased $1.2 million to $100.9 million. The increase in stockholders' equity was due to net income of $1.6 million, net stock related activities related to stock-based compensation of $88,000 and a current year decrease in accumulated other comprehensive loss of $239,000. These increases to capital were partially offset by quarterly common dividends paid of $453,000 and repurchases of common stock of $322,000. Common stockholders' equity of $100.9 million at March 31, 2016 resulted in a book value of $21.70 per common share compared to $21.48 at December 31, 2015. The Company remains well-capitalized at March 31, 2016 with a Tier 1 capital to average assets ratio of 9.77%.

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 billion.  Through its 12 banking centers 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 banking centers are located at its main office in Waldorf, Maryland, and 11 branch offices in Waldorf, Bryans Road, Dunkirk, Leonardtown, La Plata, Charlotte Hall, Prince Frederick, Lusby and California, Maryland; and Central Park and downtown Fredericksburg, Virginia.

Forward-looking Statements - This news release contains forward-looking statements within the meaning of the federal securities laws. Forward-looking statements can generally be identified by the fact that they do not relate strictly to historical or current facts. They often include words like "believe," "expect," "anticipate," "estimate" and "intend" or future or conditional verbs such as "will," "would," "should," "could" or "may." Statements in this release that are not strictly historical are forward-looking and are based upon current expectations that may differ materially from actual results. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those anticipated by the statements made herein. These risks and uncertainties involve general economic trends, changes in interest rates, loss of deposits and loan demand to other financial institutions, substantial changes in financial markets; changes in real estate value and the real estate market, regulatory changes, possibility of unforeseen events affecting the industry generally, the uncertainties associated with newly developed or acquired operations, the outcome of pending litigation, and market disruptions and other effects of terrorist activities. The Company undertakes no obligation to update these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unforeseen events, except as required under the rules and regulations of the Securities and Exchange Commission.

Data is unaudited as of March 31, 2016. 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, 2015.


THE COMMUNITY FINANCIAL CORPORATION








SELECTED FINANCIAL INFORMATION AND RATIOS (UNAUDITED)












 Three Months Ended (Unaudited) 






March 31, 2016


December 31, 2015


March 31, 2015














KEY OPERATING RATIOS










Return on average assets 


0.56

%

0.55

%

0.68

%



Return on average common equity


6.37


6.06


7.33




Return on average total equity 


6.37


6.06


6.77




Average total equity to average total assets


8.74


9.02


10.11




Interest rate spread


3.37


3.47


3.55




Net interest margin 


3.50


3.61


3.67




Cost of funds


0.73


0.74


0.70




Cost of deposits


0.47


0.47


0.47




Cost of debt


2.71


2.78


2.45




Efficiency ratio 


70.68


73.67


69.26




Non-interest expense to average assets


2.51


2.70


2.61




Avg. int-earning assets to avg. int-bearing liabilities


117.79


118.43


117.91




Net charge-offs to average loans


0.16


0.09


0.02




COMMON SHARE DATA










Basic net income per common share


$                          0.35


$                          0.33


$                          0.38




Diluted net income per common share


0.35


0.33


0.38




Cash dividends paid per common share


0.10


0.10


0.10




Weighted average common shares outstanding:










        Basic


4,594,683


4,605,033


4,694,460




        Diluted


4,624,603


4,642,081


4,694,460
















(Unaudited)








(dollars in thousands, except per share amounts)


March 31, 2016


December 31, 2015


$ Change


% Change


ASSET QUALITY










Total assets


$                 1,176,913


$                 1,143,332


$                      33,581


2.9

%

Gross loans


945,144


918,894


26,250


2.9


Classified Assets


44,512


43,346


1,166


2.7


Allowance for loan losses


8,591


8,540


51


0.6












Past due loans (PDLs) (31 to 89 days)


983


948


35


3.7


Nonperforming loans (NPLs) (>=90 days)


9,703


10,740


(1,037)


(9.7)












Non-accrual loans (a)


10,392


11,433


(1,041)


(9.1)


Accruing troubled debt restructures (TDRs) (b)


12,327


13,133


(806)


(6.1)


Other real estate owned (OREO)


11,038


9,449


1,589


16.8


Non-accrual loans, OREO and TDRs


33,757


34,015


(258)


(0.8)


ASSET QUALITY RATIOS










Classified assets to total assets


3.89

%

3.79

%





Classified assets to risk-based capital


30.79


30.19






Allowance for loan losses to total loans


0.91


0.93






Allowance for loan losses to nonperforming loans


88.54


79.52






Past due loans (PDLs) to total loans 


0.10


0.10






Nonperforming loans (NPLs) to total loans


1.03


1.17






Loan delinquency (PDLs + NPLs) to total loans


1.13


1.27






Non-accrual loans to total loans 


1.10


1.24






Non-accrual loans and TDRs to total loans 


2.40


2.67






Non-accrual loans and OREO to total assets


1.82


1.83






Non-accrual loans, OREO and TDRs to total assets 


2.87


2.98






COMMON SHARE DATA










Book value per common share


$                        21.70


$                        21.48






Common shares outstanding at end of period


4,652,292


4,645,429






OTHER DATA










Number of:










Full-time equivalent employees


168


171






Branches


12


12






Loan Production Offices


5


5






REGULATORY CAPITAL RATIOS 










Tier 1 capital to average assets


9.77

%

10.01

%





Tier 1 common capital to risk-weighted assets


9.96


10.16






Tier 1 capital to risk-weighted assets


11.14


11.38






Total risk-based capital to risk-weighted assets


14.26


14.58


























(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. Interest and principal are recognized on a cash-basis in accordance with the Bank's policy if the loans are not impaired or there is no impairment. 












(b)  At March 31, 2016 and December 31, 2015, the Bank had total TDRs of $17.4 million and $18.6 million, respectively, with three TDR relationships totaling $5.1 million and $5.4 million, respectively, in non-accrual status. These loans are classified as non-accrual loans for the calculation of financial ratios.






















 

 

THE COMMUNITY FINANCIAL CORPORATION





CONSOLIDATED STATEMENTS OF INCOME  (UNAUDITED)














Three Months Ended

(dollars in thousands, except per share amounts )


March 31, 2016


December 31, 2015

Interest and Dividend Income





   Loans, including fees 


$                  10,545


$                  10,500

   Taxable interest and dividends on investment securities


763


705

   Interest on deposits with banks


4


3

Total Interest and Dividend Income


11,312


11,208






Interest Expense





   Deposits


1,095


1,054

   Short-term borrowings


38


11

   Long-term debt


786


795

Total Interest Expense


1,919


1,860






Net Interest Income


9,393


9,348

   Provision for loan losses


427


362

Net Interest Income After Provision For Loan Losses 


8,966


8,986






Noninterest Income





   Loan appraisal, credit, and miscellaneous charges


61


106

   Net gains on sale of OREO


5


-

   Net gains on sale of investment securities


-


5

   Income from bank owned life insurance


196


199

   Service charges


588


599

Total Noninterest Income


850


909






Noninterest Expense





   Salary and employee benefits


4,152


4,148

   Occupancy expense


589


593

   Advertising


63


133

   Data processing expense 


554


544

   Professional fees


425


403

   Depreciation of furniture, fixtures, and equipment


196


195

   Telephone communications


44


47

   Office supplies


43


49

   FDIC Insurance


243


214

   OREO valuation allowance and expenses


301


377

   Other


630


853

Total Noninterest Expense


7,240


7,556






   Income before income taxes


2,576


2,339

   Income tax expense


968


811

Net Income Available to Common Stockholders


$                    1,608


$                    1,528






Earnings Per Common Share





   Basic 


$                      0.35


$                      0.33

   Diluted 


$                      0.35


$                      0.33

   Cash dividends paid per common share


$                      0.10


$                      0.10

 

The following table presents information on the average balances of the Company's interest-earning assets and interest-bearing liabilities and interest earned or paid thereon for the three months ended March 31, 2016 and December 31, 2015, respectively. There are no tax equivalency adjustments.


For the Three Months Ended


March 31, 2016



December 31, 2015






Average






Average


Average




Yield/



Average



Yield/

dollars in thousands

Balance


Interest


Cost



Balance


Interest

Cost

Assets












Interest-earning assets:












Loan portfolio (1)

$      919,058


$         10,545


4.59%



$    888,799


$    10,500

4.73%

Investment securities, federal funds












    sold and interest-bearing deposits

154,781


767


1.98%



148,181


708

1.91%

Total Interest-Earning Assets

1,073,839


11,312


4.21%



1,036,980


11,208

4.32%

Cash and cash equivalents

9,312







12,466




Other assets

71,331







67,990




Total Assets

$   1,154,482







$ 1,117,436
















Liabilities and Stockholders' Equity












Interest-bearing liabilities:












Savings

$        46,596


$                12


0.10%



$      46,829


$           12

0.10%

Interest-bearing demand and money












    market accounts

346,838


255


0.29%



337,753


244

0.29%

Certificates of deposit

396,502


828


0.84%



375,271


799

0.85%

Long-term debt 

51,926


345


2.66%



61,980


355

2.29%

Short-term debt

34,790


38


0.44%



18,797


11

0.23%

Subordinated Notes

23,000


359


6.24%



23,000


359

6.24%

Guaranteed preferred beneficial interest 












    in junior subordinated debentures

12,000


82


2.73%



12,000


80

2.67%













Total Interest-Bearing Liabilities

911,652


1,919


0.84%



875,630


1,860

0.85%













Noninterest-bearing demand deposits

133,021







130,811




Other liabilities

8,865







10,211




Stockholders' equity

100,944







100,784




Total Liabilities and Stockholders' Equity

$   1,154,482







$ 1,117,436
















Net interest income



$           9,393







$      9,348














Interest rate spread





3.37%






3.47%

Net yield on interest-earning assets





3.50%






3.61%

Ratio of average interest-earning












    assets to average interest bearing












    liabilities





117.79%






118.43%













Cost of funds





0.73%






0.74%

Cost of deposits





0.47%






0.47%

Cost of debt





2.71%






2.78%

(1) Average balance includes non-accrual loans











 

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated.  For each category of interest earning asset and interest bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume).  Changes in rate volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.



Three Months Ended March 31, 2016


compared to Three Months Ended 


December 31, 2015




Due to




dollars in thousands

Volume


Rate


Total









Interest income:







Loan portfolio (1)

$             347


$            (302)


$           45


Investment securities, federal funds







  sold and interest bearing deposits

33


26


59


Total interest-earning assets

$             380


$            (276)


$         104









Interest-bearing liabilities:







Savings

-


-


-


Interest-bearing demand and money







   market accounts

7


4


11


Certificates of deposit

44


(15)


29


Long-term debt 

(67)


57


(10)


Short-term debt

17


10


27


Subordinated notes

-


-


-


Guaranteed preferred beneficial interest 







   in junior subordinated debentures

-


2


2


Total interest-bearing liabilities 

$                 1


$                58


$           59


Net change in net interest income

$             379


$            (334)


$           45









(1) Average balance includes non-accrual loans




















 

     

THE COMMUNITY FINANCIAL CORPORATION





CONSOLIDATED STATEMENTS OF INCOME  (UNAUDITED)













Three Months Ended March 31,

(dollars in thousands, except per share amounts )


2016


2015

Interest and Dividend Income





   Loans, including fees 


$               10,545


$               10,177

   Taxable interest and dividends on investment securities


763


547

   Interest on deposits with banks


4


4

Total Interest and Dividend Income


11,312


10,728






Interest Expense





   Deposits


1,095


988

   Short-term borrowings


38


9

   Long-term debt


786


668

Total Interest Expense


1,919


1,665






Net Interest Income


9,393


9,063

   Provision for loan losses


427


178

Net Interest Income After Provision For Loan Losses 


8,966


8,885






Noninterest Income





Loan appraisal, credit, and miscellaneous charges


61


58

Gain on sale of asset


-


18

Net gains on sale of OREO


5


-

Net losses on sale of investment securities


-


(1)

Income from bank owned life insurance


196


205

Service charges


588


585

Gain on sale of loans held for sale


-


97

Total Noninterest Income


850


962






Noninterest Expense





Salary and employee benefits


4,152


4,145

Occupancy expense


589


630

Advertising


63


103

Data processing expense 


554


518

Professional fees


425


295

Depreciation of furniture, fixtures, and equipment


196


201

Telephone communications


44


46

Office supplies


43


39

FDIC Insurance


243


198

OREO valuation allowance and expenses


301


219

Other


630


549

Total Noninterest Expense


7,240


6,943






   Income before income taxes


2,576


2,904

   Income tax expense


968


1,083

Net Income


$                 1,608


$                 1,821

   Preferred stock dividends


-


23

Net Income Available to Common Stockholders


$                 1,608


$                 1,798






Earnings Per Common Share





Basic 


$                   0.35


$                   0.38

Diluted 


$                   0.35


$                   0.38

Cash dividends paid per common share


$                   0.10


$                   0.10






 

 

The following table presents information on the average balances of the Company's interest-earning assets and interest-bearing liabilities and interest earned or paid thereon for the three months ended March 31, 2016 and 2015, respectively. There are no tax equivalency adjustments.














For the Three Months Ended March 31,




2016






2015








Average






Average


Average




Yield/


Average




Yield/

dollars in thousands

Balance


Interest


Cost


Balance


Interest


Cost

Assets












Interest-earning assets:












Loan portfolio (1)

$      919,058


$         10,545


4.59%


$            852,911


$    10,177


4.77%

Investment securities, federal funds












    sold and interest-bearing deposits

154,781


767


1.98%


133,588


551


1.65%

Total Interest-Earning Assets

1,073,839


11,312


4.21%


986,499


10,728


4.35%

Cash and cash equivalents

9,312






12,163





Other assets

71,331






66,377





Total Assets

$   1,154,482






$         1,065,039

















Liabilities and Stockholders' Equity












Interest-bearing liabilities:












Savings

$        46,596


$                12


0.10%


$              42,372


$           10


0.09%

Interest-bearing demand and money












market accounts

346,838


255


0.29%


304,290


191


0.25%

Certificates of deposit

396,502


828


0.84%


379,382


787


0.83%

Long-term debt 

51,926


345


2.66%


72,530


390


2.15%

Short-term debt

34,790


38


0.44%


12,307


9


0.29%

Subordinated Notes

23,000


359


6.24%


13,800


203


5.88%

Guaranteed preferred beneficial interest 












    in junior subordinated debentures

12,000


82


2.73%


12,000


75


2.50%













Total Interest-Bearing Liabilities

911,652


1,919


0.84%


836,681


1,665


0.80%













Noninterest-bearing demand deposits

133,021






112,036





Other liabilities

8,865






8,671





Stockholders' equity

100,944






107,651





Total Liabilities and Stockholders' Equity

$   1,154,482






$         1,065,039

















Net interest income



$           9,393






$      9,063















Interest rate spread





3.37%






3.55%

Net yield on interest-earning assets





3.50%






3.67%

Ratio of average interest-earning












    assets to average interest bearing












    liabilities





117.79%






117.91%













Cost of funds





0.73%






0.70%

Cost of deposits





0.47%






0.47%

Cost of debt





2.71%






2.45%

(1) Average balance includes non-accrual loans











 

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated.  For each category of interest earning asset and interest bearing liability, information is provided on changes attributable to (1) changes in volume (changes in volume multiplied by old rate); and (2) changes in rate (changes in rate multiplied by old volume).  Changes in rate volume (changes in rate multiplied by the change in volume) have been allocated to changes due to volume.



For the Three Months Ended March 31, 2016


compared to the Three Months Ended


March 31, 2015




Due to



dollars in thousands

Volume


Rate


Total







Interest income:






Loan portfolio (1)

$             759


$            (391)


$            368

Investment securities, federal funds






  sold and interest bearing deposits

105


111


216

  Total interest-earning assets

$             864


$            (280)


$            584







Interest-bearing liabilities:






Savings

1


1


2

Interest-bearing demand and money






    market accounts

31


33


64

Certificates of deposit

36


5


41

Long-term debt 

(137)


92


(45)

Short-term debt

25


4


29

Subordinated notes

144


12


156

Guaranteed preferred beneficial interest 






    in junior subordinated debentures

-


7


7

Total interest-bearing liabilities 

$             100


$              154


$            254

Net change in net interest income

$             764


$            (434)


$            330

(1) Average balance includes non-accrual loans











 

 

THE COMMUNITY FINANCIAL CORPORATION





CONSOLIDATED BALANCE SHEETS







March 31, 2016


December 31, 2015

(dollars in thousands)


(Unaudited)



Assets





  Cash and due from banks 


$                      9,501


$                    9,059

  Federal funds sold


175


225

  Interest-bearing deposits with banks


482


1,855

  Securities available for sale (AFS), at fair value


36,636


35,116

  Securities held to maturity (HTM), at amortized cost


114,455


109,420

  Federal Home Loan Bank (FHLB) and Federal Reserve Bank (FRB) stock - at cost


6,541


6,931

  Loans receivable - net of allowance for loan losses of $8,591 and $8,540


935,499


909,200

  Premises and equipment, net


22,450


20,156

  Premises and equipment held for sale


-


2,000

  Other real estate owned (OREO)


11,038


9,449

  Accrued interest receivable


3,382


3,218

  Investment in bank owned life insurance


28,032


27,836

   Other assets


8,722


8,867

Total Assets


$               1,176,913


$             1,143,332






Liabilities and Stockholders' Equity





Liabilities





  Deposits





Non-interest-bearing deposits


$                  137,312


$                142,771

Interest-bearing deposits


813,287


764,128

  Total deposits


950,599


906,899

  Short-term borrowings


30,500


36,000

  Long-term debt


50,602


55,617

  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


9,270


10,033

Total Liabilities


1,075,971


1,043,549






Stockholders' Equity





  Common stock - par value $.01; authorized - 15,000,000 shares;





    issued 4,652,292 and 4,645,429 shares, respectively


47


46

  Additional paid in capital


46,907


46,809

  Retained earnings


54,316


53,495

  Accumulated other comprehensive loss


(12)


(251)

  Unearned ESOP shares


(316)


(316)

Total Stockholders' Equity


100,942


99,783

Total Liabilities and Stockholders' Equity


$               1,176,913


$             1,143,332






 

SOURCE The Community Financial Corporation

For further information: William J. Pasenelli, Chief Executive Officer, 888.745.2265