CORESTRENGTH

2016 ANNUAL REPORTCOMMUNITY FINANCIAL GROUP, INC.

EXCEPTIONALPERFORMANCE

Wheatland Bank's strong financial performance is proof that our vision and strategic plans for being the premier independent community bank in eastern and central Washington are generating significant value and returns for our shareholders, customers, employees and local communities. With another year of record earnings, driven by continued robust loan growth, 2016, much like 2015, was a year of enhanced favorable financial results and trends. CFG and its wholly owned subsidiary Wheatland Bank, reported consolidated net income of $2.4 million for the year ended December 31, 2016, up 38% over the 2015 net income. This substantial increase in earnings for 2016 follows 2015's improvement in net income of 37% over the prior year. Earnings per share for 2016 rose by 37% to $1.70 over the 2015 level of $1.24, and the consolidated CFG return on average equity was 8.4% for 2016, up 27% from 6.6% for 2015. These exceptional increases in earnings contributed to a 22% annualized market value appreciation of CFG stock, as determined by a December 31, 2016 independent stock valuation, and a 61% total appreciation in the market value over the last four year period. The CFG Board of Directors declared a 5% stock dividend payable March 24, 2017 and approved a related cash repurchase program at the new higher market value. Both 2016's and 2015's net income were largely fueled by new customer relationships and outstanding record loan growth from the Bank’s 2015 expansion into the Tri-Cities market, as well as continued growth from its other eastern and central Washington markets.

Wheatland Bank finished 2016 with $365 million in total assets, $240 million in total net loans and total deposits of $327 million. Following 2015's year of the highest percentage organic loan growth of any bank in Washington State, Wheatland had another year of solid loan growth of 10%. Wheatland's larger loan portfolio drove the consolidated net interest income up 14% for the year ended December 31, 2016 to $12.9 million from $11.3 million for 2015. Loan quality continues to be very good and compares favorably to industry standards with only .25% of Wheatland's loans delinquent, and only .04% of its loans in a nonaccrual status as of December 31, 2016. The allowance for loan losses is fully funded to an amount significantly in excess of anticipated future losses and the Bank and CFG are well capitalized by all regulatory standards.

Our mission is to help our customers truly succeed, manage risk and build wealth for long-term generational prosperity. With deep roots in agricultural and commercial banking, Wheatland uses its industry expertise, local market knowledge and decentralized lending structure to provide operating capital and finance new business opportunities for its customers, while also working closely with them as trusted advisors to help mitigate risks associated with various business and economic cycles. The loan portfolio has been funded with Wheatland's stable low cost core deposits, which we attribute to a very loyal and growing customer base and our needs based consultative customer service approach to delivering state of the art depository and treasury management services.

Now for the future. The Board of Directors updated its master strategic plan recently and we will continue to focus on remaining independent and enhancing shareholder value through a balanced approach to growth and earnings. During the fourth quarter of 2016, we launched a strategic initiative to significantly expand our residential lending division to better serve our growing regional branch footprint and local communities with a wider range of services to finance home purchases, refinances and construction loans. We project that this new division will not only directly enhance the net income of the Bank, but will also indirectly do so by facilitating cross referrals and therefore growth of new customer relationships, loans and core deposits.

Meanwhile, the external banking industry around us continues to consolidate. During the last decade alone, Washington State has seen a reduction in the number of FDIC insured banks from 86 to 45, and there are only 14 banks remaining which are headquartered in eastern and central Washington. We believe that Wheatland Bank is uniquely positioned with its relationship banking model and specialization in agricultural and small business banking, to seize opportunities and thrive as the premier independent community bank in our local markets. The Bank is fortunate to have a very dedicated Board of Directors and 123 of the most talented and hardworking employees, who together, are fully committed to our mission of ensuring our customers receive the highest value of financial services to assist them in achieving their long term goals. As always, thank you for investing in Wheatland Bank and CFG, for your banking business and your referrals. Please call me if you have any questions or feedback during the year.

Dear Fellow Shareholders

Sincerely,

Susan M. Horton, CPAChairman, CEO and President

$ in thousands

CFG CONSOLIDATED NET INCOME

$1,50 0

$2,50 0

$2,0 0 0

$0

$1,0 0 0

$50 0

2012 2013 2014 2015 2016

*As adjusted for subsequent stock dividends

EARNINGS PER SHARE*

$02012 2013 2014 2015

$1.50

$1.0 0

$.50

$2.0 0

2016

MARKET VALUE PER SHARE*

$15

$25

$20

$0

$10

$5

*As adjusted for subsequent stock dividends

$0

2.0 0%

RETURN ON AVERAGE EQUITY

6 .0 0%

10.0 0%

8.0 0%

4.0 0%3.2%

2012 2013 2014 2015 2016

4.9% 5.2%

6.6%

8.4%

2012 2013 2014 2015 2016

$18.27

$14.98$17.36

$19.69

$24.05

$731

$1,151$1,286

$1,763

$2,441

$0.52

$1.24

$0.81

$1.70

$0.91

C O N S O L I D AT E D S TAT E M E N T S O F

F INANCIAL CON DIT ION

December 31,

2016 2015

Assets

Cash and due from banks $ 12,155,462 $ 5,840,252

Federal funds sold and overnight deposits 10,302,179 20,393,618

Cash and cash equivalents 22,457,641 26,233,870

Interest-bearing deposits in banks 34,271,000 46,769,000

Securities available-for-sale, at fair value 41,154,971 35,969,983

Federal Home Loan Bank stock, at cost 424,900 409,000

Investment in statutory trust 124,000 124,000

Loans held for sale 506,325 530,800

Loans receivable, net of allowance for loan losses;

2016 $2,836,067; 2015 $3,094,183 240,440,639 219,180,049

Premises and equipment, net 15,314,853 15,385,573

Bank owned life insurance 7,497,958 7,175,636

Other real estate held-for-sale 136,874 139,500

Accrued interest receivable and other assets 2,665,782 2,548,937

Total assets $ 364,994,943 $ 354,466,348

Liabilities and stockholders’ equity

Liabilities

Deposits:

Noninterest-bearing $ 152,289,366 $ 137,654,607

Interest-bearing 175,113,520 181,576,968

Total deposits 327,402,886 319,231,575

Deferred tax liability, net 420,225 561,344

Subordinated debt 4,124,000 4,124,000

Employee Stock Ownership Plan debt 380,794 496,572

Accrued interest payable and other liabilities 2,625,042 2,010,450

Total liabilities 334,952,947 326,423,941

Stockholders’ equity

Preferred stock - no par value, 300,000 shares authorized; – –

none issued

Common stock - no par value, 2,000,000 shares authorized;

Shares issued and outstanding

December 31, 2016 - 1,375,262

December 31, 2015 - 1,336,679 26,425,706 25,632,945

Retained earnings 3,843,858 2,504,196

Employee Stock Ownership Plan debt guarantee (380,794) (496,572)

Accumulated other comprehensive income 153,226 401,838

Total stockholders’ equity 30,041,996 28,042,407

Total liabilities and stockholders’ equity $ 364,994,943 $ 354,466,348

C O N S O L I D AT E D S TAT E M E N T S O F

COM PREHEN S I VE INCOME

Year Ended December 31,

2016 2015

Interest income

Loans receivable, including fees $ 11,969,413 $ 10,335,642

Interest-bearing deposits and federal funds sold 556,163 630,821

Investment securities

Taxable 338,793 332,862

Non-taxable 358,805 337,731

Total interest income 13,223,174 11,637,056

Interest expense

Deposits 155,542 185,452

Borrowed funds 175,810 148,847

Total interest expense 331,352 334,299

Net interest income 12,891,822 11,302,757

Provision for loan losses – –

Net interest income after provision for loan losses 12,891,822 11,302,757

Noninterest income

Service charges on deposit accounts 754,330 713,990

Third party bankcard interchange income 658,377 645,142

Residential mortgage origination and sale income 246,510 257,741

Net gain on sale of available-for-sale securities – 94,590

Other noninterest income 665,802 382,998

Total noninterest income 2,325,019 2,094,461

Noninterest expense

Salaries and benefits, net of direct loan origination costs 7,052,985 6,297,255

Occupancy 1,170,312 1,077,192

Information technology 950,594 918,258

Furniture and equipment depreciation and maintenance 378,012 443,441

Legal, audit and regulatory examinations 268,682 232,791

Regulatory insurance and assessments 191,110 224,655

Supplies and postage 193,185 198,419

Excise tax 207,437 177,659

Other operating expenses 1,405,892 1,346,995

Total noninterest expense 11,818,209 10,916,665

Income before income taxes 3,398,632 2,480,553

Federal income tax expense 957,838 717,645

Net income $ 2,440,794 $ 1,762,908

Other comprehensive income (loss)

Unrealized gains (losses) in securities available-for-sale (376,685) 303,707

Reclassification adjustment for (gains) losses realized in net income – (94,590)

Tax effect 128,073 (71,100)

Total other comprehensive income (loss) (248,612) 138,017

Total comprehensive income $ 2,192,182 $ 1,900,925

Basic earnings per share $ 1.70 $ 1.24

Diluted earnings per share $ 1.69 $ 1.24

C O N S O L I D AT E D S TAT E M E N T S O F

F INANCIAL CON DIT ION

C O N S O L I D AT E D S TAT E M E N T S O F

CHANGES IN STOCKHOLDERS’ EQUITY

Accumulated

ESOP Other

Common Stock Retained Debt Comprehensive

Shares Amount Earnings Guarantee Income (Loss) Total

Balance at December 31, 2014 1,261,668 $ 24,329,171 $ 1,744,094 $ (607,185) $ 263,821 $ 25,729,901

4% stock dividend on

April 6, 2015 50,266 1,002,806 (1,002,806) – – –

Redemption of fractional shares – (4,004) – – – (4,004)

Stock options exercised 24,745 304,972 – – – 304,972

Guarantee of ESOP debt – – – 110,613 – 110,613

Net income – – 1,762,908 – – 1,762,908

Change in unrealized holding gain

on securities available-for-sale,

net of $71,100 income tax effect – – – – 138,017 138,017

Balance at December 31, 2015 1,336,679 25,632,945 2,504,196 (496,572) 401,838 28,042,407

4% stock dividend on

April 4, 2016 53,272 1,101,132 (1,101,132) – – –

Redemption of fractional shares – (4,034) – – – (4,034)

Stock repurchased (14,834) (306,618) – – – (306,618)

Stock options exercised 145 2,281 – – – 2,281

Guarantee of ESOP debt – – – 115,778 – 115,778

Net income – – 2,440,794 – – 2,440,794

Change in unrealized holding gain

on securities available-for-sale,

net of $128,073 income tax effect – – – – (248,612) (248,612)

Balance at December 31, 2016 1,375,262 $ 26,425,706 $ 3,843,858 $ (380,794) $ 153,226 $ 30,041,996

C O N S O L I D AT E D S TAT E M E N T S O F

C A SH FLOW S

Year Ended December 31,

2016 2015

Cash flows from operating activities

Net income $ 2,440,794 $ 1,762,908

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 688,735 724,007

Net amortization of premiums and discounts on securities available-for-sale 536,427 672,947

Changes in loans held for sale 24,475 (185,800)

(Gain) loss on disposal of premises and equipment 1,764 (3,925)

Impairment of other real estate held-for-sale – 30,241

Realized (gain) loss on securities available-for-sale, net – (94,590)

Provision (benefit) for deferred income taxes (13,046) (123,729)

Increase in cash surrender value of bank owned life insurance (359,476) (169,895)

Change in assets and liabilities:

Accrued interest receivable and other assets (116,845) (610,631)

Accrued interest payable and other liabilities 614,592 (138,717)

Net cash provided by operating activities 3,817,420 1,862,816

Cash flows from investing activities

Net change in interest-bearing deposits 12,498,000 28,544,000

Securities available-for-sale:

Purchases (12,319,299) (3,366,165)

Proceeds from sales – 17,256,231

Proceeds from maturities, calls or principal reductions 6,221,199 6,619,471

Purchases of FHLB stock (4,091,000) (2,415,600)

Proceeds from redemption of FHLB stock 4,075,100 2,918,900

Net (increase) decrease in loans receivable (21,260,590) (57,841,837)

Purchase of life insurance policies – (4,500,000)

Proceeds from surrender of life insurance policies 37,154 –

Purchases of premises and equipment (619,959) (6,069,819)

Proceeds from sale of equipment 180 3,925

Proceeds from sale of other real estate held-for-sale 2,626 –

Net cash used by investing activities (15,456,589) (18,850,894)

Cash flows from financing activities

Net increase in deposits 8,171,311 11,115,049

Proceeds from stock options exercised 2,281 304,972

Cash paid for repurchase of common stock (306,618) –

Fractional shares paid in cash (4,034) (4,004)

Net cash provided by financing activities 7,862,940 11,416,017

Net change in cash and cash equivalents (3,776,229) (5,572,061)

Cash and cash equivalents at beginning of year 26,233,870 31,805,931

Cash and cash equivalents at end of year $ 22,457,641 $ 26,233,870

Supplemental disclosure of cash flow information

Cash paid during the year for:

Interest $ 333,969 $ 350,719

Income taxes $ 894,086 $ 894,316

BOARD OF DIRECTORS

Susan M. Horton, CPAChairmanCommunity Financial Group, Inc.Wheatland Bank

Charles R. CooperDirectorCommunity Financial Group, Inc.Wheatland Bank

Dennis D. BlyVice ChairmanCommunity Financial Group, Inc.Wheatland Bank

Donna T. Herak BockDirectorCommunity Financial Group, Inc.Wheatland Bank

Howard E. LeffelSecretaryCommunity Financial Group, Inc.Wheatland Bank

Richard A. VandervertDirectorCommunity Financial Group, Inc.Wheatland Bank

Christopher D. BellDirectorWheatland Bank

Scott K. JonesDirectorWheatland Bank

Marlo D. MerrellDirectorWheatland Bank

C O R P O R A T E

Directors from left to right: Marlo Merrell, Dennis Bly, Scott Jones, Chuck Cooper, Susan Horton, Chris Bell,

Donna Herak Bock, Dick Vandervert and Mike Leffel

L E A D E R S H I P

SENIOR MANAGEMENT

Joseph W. DruffelExecutive Vice PresidentChief Credit OfficerChief Compliance Officer

Allison R. Yarnell, CPAExecutive Vice President Chief Financial Officer

Michael W. PalmerExecutive Vice PresidentChief Banking OfficerTeam Leader - Spokane / Lincoln / Adams / Grant Counties

Susan M. Horton, CPAPresident Chief Executive Officer

Erik W. HopkinsSenior Vice PresidentTeam Leader - Chelan / Douglas Counties

Stephen J. LancasterSenior Vice PresidentTeam Leader - Benton / Franklin Counties

David D. MurraySenior Vice PresidentTeam Leader - Yakima / Kittitas Counties

Mary K. SwansonSenior Vice PresidentBank OperationsSecurity and Bank Secrecy Act Officer

Kitt R. ZimmermanSenior Vice PresidentChief Information Officer

Troy W. SimsSenior Vice PresidentDirector of Residential Lending Services

QUINCY

1015 Central Ave S

Quincy, WA 98848

(509) 787-9808

MOSES LAKE

1442 S Pioneer Way

Moses Lake, WA 98837

(509) 764-4602

SPOKANE VALLEY

14732 E Indiana Ave

Spokane Valley, WA 99216

(509) 232-5705

SPOKANE DOWNTOWN

222 N Wall St, Ste 100

Spokane, WA 99201

(509) 458-2265

DAVENPORT

600 Morgan St

Davenport, WA 99122

(509) 725-0211

WILBUR

8 SE Main St

Wilbur, WA 99185

(509) 647-5518

ODESSA

22 E 1st Ave

Odessa, WA 99159

(509) 982-2641

RITZVILLE

101 E 1st Ave

Ritzville, WA 99169

(509) 659-0330

COMMUNITY FINANCIAL GROUP, INC. & WHEATLAND BANK ADMINISTRATIVE HEADQUARTERS

222 N Wall St, Ste 308Spokane, WA 99201

(509) 242-5626 (888) 896-2577

W H E A T L A N D

SPOKANE NORTHSIDE

10801 N Newport Highway

Spokane, WA 99218

(509) 232-4325

WENATCHEE

1115 N Miller St

Wenatchee, WA 98801

(509) 663-5100

YAKIMA

201 E Yakima Ave, Ste 100

Yakima, WA 98901

(509) 452-7728

ELLENSBURG

205 S Main St, Ste 1

Ellensburg, WA 98926

(509) 933-3200

CHELAN

134 E Woodin Ave

Chelan, WA 98816

(509) 682-1400

PASCO

9715 Sandifur Parkway

Pasco, WA 99301

(509) 545-5626

WHEATLAND WEALTH MANAGEMENT

222 N Wall Street, Ste 100

Spokane, WA 99201

(509) 458-5200

WHEATLAND BANK HOME LOAN CENTER

222 N Wall Street, Ste 101

Spokane, WA 99201

(509) 838-5626

L O C A T I O N S