The Freedom Bank of Virginia Reports Record Earnings and the Board Approves Formation of Bank Holding Company

FAIRFAX, Va., July 29, 2021 /PRNewswire/ -- The Freedom Bank of Virginia (OTCQX: FDVA), (the "Bank" or "Freedom") today announced net income of $2,626,381, or $0.36 per diluted share, for the three months ended June 30, 2021. This compares to net income of $2,468,211 or $0.34 per diluted share, for the linked quarter and net income of $1,525,525 or $0.21 per diluted share for the three months ending June 30, 2020. Net income for the first six months of 2021 was $5,094,592 or $0.69 per diluted share compared to net income of $2,375,331 or $0.33 per diluted share for the first six months of 2020. The Bank is also pleased to announce that the Board of Directors has approved the formation of a new bank holding company, subject to regulatory approval.

Joseph J. Thomas, President and CEO, commented, "I am proud of our team for delivering another quarter of record earnings with diluted EPS for the second quarter of 2021 higher by 71.43% compared to the same period in 2020. In particular, the 22.06% (annualized) organic loan growth (excluding PPP loans) achieved in the second quarter of 2021 is evidence of our momentum as the economy opens up and we return to work in person. The Bank was able to combat the compression in loan yields by continuing to improve our deposit mix, which reduced the cost of funds for the second quarter to 42 basis points. We celebrated Freedom Bank's 20th Anniversary on July 23 and the formation of the new holding company will put the Bank in the best position going forward to respond to evolving market conditions with more capital alternatives and will allow us to take advantage of future opportunities as they arise."

Second Quarter 2021 Highlights include:

• Net income for the second quarter was $2,626,381 or $0.36 per diluted share compared to net income of $2,468,211 or $0.34 per diluted share in the linked quarter and net income of $1,525,525 or $0.21 per diluted share for the three months ended June 30, 2020. The 72.16% increase in net income across calendar quarters was primarily due to an increase in earning assets and an expansion in net interest margin compared to the prior calendar quarter;
• Pre-tax, pre-provision net income increased by 34.16% to $3,431,336 for the second quarter compared to pre-tax, pre-provision net income of $2,557,622 for the same period in 2020;
• Return on Average Assets ("ROAA") was 1.24% for the quarter ended June 30, 2021 compared to 1.26% for the linked quarter and 0.92% for the three months ended June 30, 2020. ROAA for the first six months of 2021 was 1.25% compared to 0.82% for the same period in 2020;
• Return on Average Equity ("ROAE") was 13.65% for the three months ended June 30, 2021 compared to 13.44% for the linked quarter and 9.24% for the three months ended June 30, 2020. ROAE for the first six months of 2021 was 13.55% compared to 7.28% for the same period in 2020;
• Total assets were $837.07 million on June 30, 2021, an increase of $70.02 million or 9.13% from total assets on December 31, 2020;
• Loans held-for-investment (excluding PPP loans) increased by $26.16 million or 5.50% during the quarter, while PPP loan balances decreased by $27.0 million on loan forgiveness and mortgage loans held for sale decreased by $22.43 million, on a decline in mortgage activity;
• Cash balances at the Federal Reserve decreased by $27.87 million during the second quarter;
• Total deposits decreased by $5.01 million or by 0.80% in the second quarter and increased by $73.61 million or 13.42% in the first six months of 2021. Non-interest bearing demand deposits increased by $9.42 million from the linked quarter to $226.86 million and represented 36.47% of total deposits on June 30, 2021;
• The net interest margin decreased in the second quarter to 3.38%, lower by 17 basis points compared to the linked quarter and higher by 45 basis points compared to the same period in 2020. Excluding the additional income from forgiveness of PPP loans, the net interest margin would have been 3.13%. The decrease in the net interest margin across linked quarters was primarily due to lower yields on loans and investments, down by 13 basis points and 12 basis points respectively, partially offset by a 9 basis point reduction in funding costs. Loan payoff activity during the second quarter was the primary cause of the decrease in loan yields;
• The cost of funds was 0.42% for the second quarter, lower by 9 basis points compared to the linked quarter and lower by 46 basis points compared to the same period in 2020, as deposit and borrowing costs declined;
• Non-interest income decreased by 25.10% compared to the linked quarter, primarily due to lower mortgage revenue as higher rates caused mortgage activity to slow from the linked quarter;
• Non-interest expense decreased by 13.91% compared to the linked quarter and increased by 4.83% compared to the same period in 2020. The decrease in non-interest expense in linked quarters was primarily due to lower performance related costs: specifically, commissions paid to mortgage loan officers and mortgage settlement costs;
• The Efficiency Ratio was 62.38% for the quarter ended June 30, 2021, compared to 67.91% for the linked quarter and 67.97% for the same period in 2020;
• Asset quality improved with the ratio of non-performing assets to total assets at 0.11% on June 30, 2021 compared to 0.41% on December 31, 2020;
• As a result of an increase in loans held-for-investment during the quarter and an assessment of the risks in the held-for-investment loan portfolio, the Bank recognized a $191,000 provision for loan losses during the second quarter and the ratio of the allowance for loan and lease losses to loans held-for-investment was 0.96% (or 1.15% excluding PPP loans, which carry a full faith and guarantee of the US Government) compared to 0.92% in the linked quarter (or 1.16% excluding PPP loans);
• The Bank continues to be well capitalized and capital ratios continue to be strong with a Leverage ratio of 10.56%, Common Equity Tier 1 ratio of 12.90%, Tier 1 Risk Based Capital ratio of 12.90% and a Total Capital ratio of 13.86%.

Pre-tax, Pre-Provision Income

Pre-tax, pre-provision net income increased by 34.16% to $3,431,336 for the second quarter compared to pre-tax, pre-provision net income of $2,557,622 for the same period in 2020;

Paycheck Protection Program ("PPP") Activity

In the second quarter of 2020, the Bank processed and funded 510 PPP loans (referred to as 2020 PPP loans), with balances of $106.37 million. The interest rate on these 2020 PPP loans was 1% and the term varied from two to five years. The SBA also paid processing fees which were deferred over the term of the loans. The loans were fully guaranteed and could be forgiven in whole or in part by the SBA.

In December of 2020, Congress approved a renewal of the PPP loan program with different rules and requirements for small businesses to receive loans, referred to as Round two PPP loans. These 2021 PPP loans were also fully guaranteed and may be forgiven in whole or in part by the SBA. The interest rate on the loans was 1% and the term was five years. As with 2020 PPP loans, the SBA paid processing fees which are being deferred over the term of the loans. The Bank originated $53.89 million of Round two PPP loans during 2021.

Beginning in January of 2021, the bank began to process loan forgiveness applications from borrowers of 2020 PPP loans. As of June 30, 2021, the SBA had forgiven 354 of these PPP loans with balances of $55.08 million, and the bank had recognized income from acceleration of processing fees of $1.09 million.

Net Interest Income

The Bank recorded net interest income of $6.83 million for the second quarter of 2021, an increase of 2.37% compared to the linked quarter, and 44.72% higher than the same period in 2020. The net interest margin in the second quarter of 2021 was 3.38%, lower by 17 basis points compared to the linked quarter and higher by 45 basis points compared to the same period in 2020. Income from PPP loan forgiveness during the second quarter was $513,543 (from $30.25 million of PPP loans forgiven by the SBA), compared to PPP loan forgiveness income of $576,748 (from $24.83 million of PPP loans forgiven by the SBA) during the first quarter of 2021. Excluding the additional income from forgiveness of PPP loans, the net interest margin in the second quarter would have been 3.13%.

The following factors contributed to the changes in net interest margin during the second quarter of 2021 compared to the linked quarter:

• While average loan balances and investments increased during the second quarter, the increase in average deposits was far greater and average cash balances surged during the quarter, pressuring yields on average earning assets.
• Yields on average earning assets decreased by 24 basis points to 3.78% compared to 4.02% in the linked quarter, primarily due to lower yields on loans and investment securities.
• Loan yields decreased by 13 basis points to 4.48% from 4.61% in the linked quarter, while yields on investment securities decreased by 12 basis points to 2.22% from 2.34% in the linked quarter.
• Cost of funds decreased by 9 basis points to 0.42%, from 0.51% in the linked quarter, on continued declines in deposit and borrowing costs.
• Excluding the additional income from PPP loan forgiveness would have reduced the net interest margin by 25 basis points.

Non-interest Income

Non-interest income was $2.29 million for the second quarter, lower by 25.10% compared to the linked quarter and lower by 29.81% compared to the same period in 2020. The decline in non-interest income compared to the previous quarter and calendar quarter was largely due to lower mortgage gain-on-sale and fee revenue, stemming from a decline in mortgage activity.

Total Revenue

Total revenue, defined as the sum of net interest income, before provision for loan losses, and non-interest income, was less than the linked quarter, primarily due to lower non-interest income, and higher by 14.23% compared to the same period in 2020.

Non-interest Expenses

Non-interest expenses in the second quarter of 2021 decreased by 13.91% compared to the linked quarter and increased by 4.83% compared to the same period in 2020. The decline in non-interest expenses in the second quarter compared to the linked quarter was largely due to lower costs related to mortgage commissions and mortgage settlements.

The Efficiency Ratio was 62.38% for the quarter ended June 30, 2021, compared to 67.91% for the prior quarter and 67.97% for the same period in 2020.

Income Taxes

The bank's effective tax rate during the quarter was 18.95% compared to an effective tax rate of 21.83% in the fourth quarter of 2020. The lower effective tax rate was largely due to application of tax credits received from an investment in low income housing tax credits. The bank expects to receive additional tax credits from this investment in 2021.

Asset Quality

Non-accrual loans were $879,089 or 0.15% of loans held-for-investment at the end of the second quarter of 2021, compared to $2.48 million or 0.41% of loans held-for-investment at the end of the linked quarter. There were no troubled debt restructurings ("TDRs") as of June 30, 2021. On June 30, 2021, there were no loans that were 90 days or more past due and accruing.  There was no Other Real Estate Owned ("OREO") on the balance sheet as of June 30, 2021. Total non-performing assets (defined as the sum of loans on non-accrual, loans greater than 90 days past due and accruing, loans that are TDRs but not on non-accrual, and OREO assets) were $879,089 or 0.11% of total assets at June 30, 2021 compared to $2.48 million or 0.28% of total assets, at the end of the linked quarter.

In 2020, in accordance with the spirit and provisions of the CARES Act, the Bank allowed borrowers who had been impacted by the COVID-19 pandemic to defer loan payments for six months. All of those borrowers had resumed loan payments and there were no loans on payment deferrals as of June 30, 2021.

Following an assessment of the collectability of the loans held-for-investment at the end of the first quarter, it was determined that a $191,000 provision for loan losses was necessary to account for loan growth and changes to environmental factors. The Bank booked a provision of $64,000 in the first quarter of 2021. The Bank's ALLL ratio was 0.96% of loans held-for-investment (or 1.15% of loans held-for investment excluding PPP loans) as of June 30, 2021 compared to an ALLL ratio of 0.92% at March 31, 2021 (or 1.16% of loans held-for-investment excluding PPP loans).

Total Assets

Total assets at June 30, 2021 were $837.07 million compared to $871.04 million on March 31, 2021. Changes in major asset categories during linked quarters were as follows:

• Cash balances at the Federal Reserve decreased by $27.87 million
• Available for sale investment balances increased by $14.27 million
• PPP loan balances decreased by $27.02 million on loan forgiveness by the SBA
• Other loans held-for investment grew by $26.16 million
• Mortgage loans held-for-sale declined by $22.43 million

Total Liabilities

Total liabilities at June 30, 2021 were $758.07 million compared to total liabilities of $795.41 million on March 31, 2021. Total deposits were $622.10 million compared to total deposits of $627.12 million on March 31, 2021. Non-interest bearing demand deposits increased by $9.42 million during the quarter, and comprised 36.47% of total deposits at the end of the quarter, compared to 35.19% of total deposits on December 31, 2020. Federal Home Loan Bank advances declined by $2.75 million during the quarter, while PPP Liquidity Facility term advances decreased by $24.92 million, in line with PPP loan forgiveness.

Stockholders' Equity and Capital

Stockholders' equity at June 30, 2021 was $78.99 million compared to $75.63 million on March 31, 2021. Additional paid-in capital was $59.46 million on June 30, 2021 compared to $59.35 million on March 31, 2021. Accumulated Other Comprehensive Income ("AOCI"), which generally comprises unrealized gains and losses on available-for-sale securities and derivative positions, increased by $623,126 on net unrealized gains during the second quarter of 2021.  Total shares issued and outstanding were 7,305,581 on June 30, 2021 compared to 7,307,915 shares on March 31, 2021. The tangible book value of the Bank's common stock at June 30, 2021 was $10.81 per share compared to $10.35 per share on March 31 2021 and $9.33 per share on June 30, 2020.

As of June 30, 2021 of the Bank's capital ratios were well above regulatory minimum capital ratios for well-capitalized banks. The Bank's capital ratios on June 30, 2021 and March 31, 2021 were as follows:

Bank Holding Company

Applications will be filed with the appropriate regulators and, if approved, the Bank would become a subsidiary of the newly-formed bank holding company to be named Freedom Financial Holdings, Inc. The Board of Directors believe that forming a holding company now provides more efficient access to capital markets if the need arises, creates flexibility in the overall capital management for our organization, and broadens the nature of non-bank activities that can be conducted.

Current shareholders of the Bank would become shareholders of the newly-formed bank holding company and current shareholders will have the same rights and ownership percentage in the new holding company as they presently have in the bank. The Bank's Board of Directors believes this new corporate structure will provide added financial and operational flexibility for the Bank at a time when the Board is focused on continued growth and expansion of the Bank.

The holding company formation will not impact the Bank's operations; the Bank will continue to provide its full range of financial services comprised of retail banking, commercial banking, and mortgage products. The Bank's headquarters will remain in Fairfax, VA as will the newly-formed holding company.

About Freedom Bank

Freedom Bank is a community-oriented bank with locations in Fairfax, Reston, Chantilly, Vienna, and Manassas, Virginia. Freedom Bank also has a mortgage division headquartered in Chantilly. For information about Freedom Bank's deposit and loan services, visit the Bank's website at www.freedom.bank.

Forward Looking Statements

This release contains forward-looking statements, including our expectations with respect to future events that are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from management's projections, forecasts, estimates, and expectations include: fluctuation in market rates of interest and loan and deposit pricing; general economic and financial market conditions, in the United States generally and particularly in the markets in which the Bank operates and which its loans are concentrated, including the effects of declines in real estate values, an increase in unemployment levels and slowdowns in economic growth, including as a result of COVID-19;  maintenance and development of well-established and valued client relationships and referral source relationships; the adequacy or inadequacy of our allowance for loan and lease losses; acquisition or loss of key production personnel; and the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as COVID-19), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Bank's borrowers to satisfy their obligations to the Bank, on the value of collateral securing loans, on the demand for the Bank's loans or its other products and services, on incidents of cyberattack and fraud, on the Bank's liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Bank's business operations and on financial markets and economic growth. The Bank cautions readers that the list of factors above is not exclusive. The forward-looking statements are made as of the date of this release, and the Bank may not undertake steps to update the forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made. In addition, our past results of operations are not necessarily indicative of future performance.  Some of the financial tables in this document reflect classifications to accounts to improve consistency in financial reporting.

Contact:
Joseph J. Thomas
President  & Chief Executive Officer
703-667-4161: Phone
[email protected]: Email