NOTE 2 – BUSINESS COMBINATION AND GOODWILL

Business Combinations

Generally, acquisitions are accounted for under the acquisition method of accounting in accordance with Accounting Standards Codification (“ASC”) 805, “Business Combinations.” Both the purchased assets and liabilities assumed are recorded at their respective acquisition date fair values. Determining the fair value of assets and liabilities, especially the loan portfolio, is a complicated process involving significant judgment regarding methods and assumptions used to calculate estimated fair values. Fair values are preliminary and subject to refinement for up to one year after the closing date of the acquisition as additional information regarding fair values becomes available.

County First Bank

On January 1, 2018, the Company completed its previously announced merger of County First with and into the Bank, with the Bank as the surviving bank (the “Merger”) pursuant to the Agreement and Plan of Merger, dated as of July 31, 2017, by and among the Company, the Bank and County First (the “Merger Agreement”). Pursuant to the Merger Agreement, at the effective time of the Merger (the “Effective Time”), each share of common stock, par value $1.00 per share, of County First issued and outstanding immediately prior to the Effective Time was converted into the right to receive 0.9543 shares of Company common stock and $2.20 in cash (the “Merger Consideration”). The $2.20 in cash represents the sum of (a) $1.00 in cash consideration (the “Cash Consideration”) plus (b) $1.20 in Contingent Cash Consideration that was determined before the completion of the Merger in accordance with the terms of the Merger Agreement. The aggregate merger consideration consisted of 918,526 shares of the Company’s common stock and $2.1 million in cash. Based upon the $38.78 per share price of the Company’s common stock, the transaction value was $37.7 million.

County First had five branch offices in La Plata, Waldorf, New Market, Prince Frederick and California, Maryland. The Bank kept the La Plata branch open and consolidated the remaining four branches with legacy Community Bank of the Chesapeake branch offices in May of 2018.

The assets acquired and liabilities assumed from County First were recorded at their fair values as of the closing date of the merger. Goodwill of $10.3 million was recorded at the time of the acquisition. Refinements to the fair value adjustments for premises and equipment and deferred taxes, resulted in aggregate goodwill of $10.7 million at September 30, 2018 an increase of $431,000 from the goodwill estimated at the time of acquisition.

The following table summarizes the consideration paid by the Company in the merger with County First and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date:


(dollars in thousands)	As Recorded by County First	Fair Value and Other Merger Related Adjustments	As Recorded by the Company

Consideration Paid
Cash			$ 2,122
Common shares issued			35,620
Fair Value of Total Consideration Transferred			$ 37,742

Recognized amounts of identifiable assets acquired and liabilities assumed
Cash and cash equivalents	$ 34,409	$ -	$ 34,409
Securities	38,861	(619)	38,242
Loans, net of allowance	142,404	(1,654)	140,750
Premises and equipment	2,980	181	3,161
Core deposit intangibles	-	3,590	3,590
Interest receivable	513	(12)	501
Bank owned life insurance	6,275	-	6,275
Deferred tax asset	639	(339)	300
Other assets	586	-	586
Total assets acquired	$ 226,667	$ 1,147	$ 227,814

Deposits	$ 199,210	$ 18	$ 199,228
Other liabilities	1,449	103	1,552
Total liabilities assumed	$ 200,659	$ 121	$ 200,780
Net identifiable assets acquired	$ 26,008	$ 1,026	$ 27,034

Goodwill resulting from acquisition			$ 10,708

The following table presents certain pro forma information as if County First had been acquired on January 1, 2017. These results combine the historical results of County First in the Company’s consolidated statement of income and, while certain adjustments were made for the estimated impact of certain fair value adjustments and other acquisition-related activity, they are not indicative of what would have occurred had the acquisition taken place on January 1, 2017. Merger and acquisition costs of $741,000 and $3.6 million (pre-tax) are included in the Company’s consolidated statements of income for the three and nine months ended September 30, 2018. The Company has not segregated County First earnings after the acquisition date as the bank’s operations have been merged into Community Bank of the Chesapeake and it would be impractical to do so. There are no assumptions about what merger related costs would have been in the proforma information below, only actual expenses are included in net income. Furthermore, additional expenses related to systems conversions and other costs of integration are expected to be recorded during 2018. Additionally, the Company expects to achieve further operating cost savings and other business synergies as a result of the acquisition which are not reflected in the pro forma amounts below:


Proforma Results for the Nine Months Ended September 30, 2017
(dollars in thousands, except per share amounts)	The Community Financial Corporation Actual	County First Actual	Proforma September 30, 2017	Actual Results Nine Months Ended September 30, 2018

Total revenues (net interest income plus noninterest income)	$ 35,698	$ 6,561	$ 42,259	$ 41,056
Net income	7,667	1,009	8,676	7,414
Basic earnings per common share	$ 1.66	$ 1.10	$ 1.56	$ 1.34