Freedom Financial Holdings Announces Earnings for First Quarter of 2023

FAIRFAX, Va. (April 27, 2023) Freedom Financial Holdings (OTCQX: FDVA), (the "Company" or "Freedom"), the holding company for The Freedom Bank of Virginia (the "Bank") today announced net income of $1,236,635, or $0.17 per diluted share, for the three months ended March 31, 2023. This compares to net income of $2,861,939  or $0.39 per diluted share, for the linked quarter and net income of $2,784,297 or $0.38 per diluted share for the three months ended March 31, 2022. Tangible book value per share in the first quarter of 2023 was higher by 2.68% from the prior quarter but was lower by 2.10% compared to the same period in 2022, primarily due to changes in Accumulated Other Comprehensive Income ("AOCI"). 

Joseph J. Thomas, President, and CEO, commented, "This has been a challenging quarter in banking, but our company's liquidity position remains very strong due to close client relationships and diverse deposit products. We increased total deposits by $25.97 million, a 12.2% annualized rate, during the quarter. Balance sheet metrics showed broad improvement relative to the prior quarter, including a tangible common equity ratio of 7.38% (adjusted for unrealized losses on our small number of held-to-maturity securities) and an annualized growth in tangible book value1 per share of 10.7% to $10.71 during the first quarter. Our ratio of uninsured deposits to total deposits has been steadily declining and as of March 31, 2023, was at 21.77%. The ratio of total liquidity to uninsured deposits has also been increasing steadily and was at 149.16% as of March 31, 2023, even after paying down FHLB advances by 20% during the quarter. The Company continued to actively deploy workout strategies to reduce non-performing assets, which were down by 21.3% during the quarter to 0.96% of loans held-for-investment. Loan loss reserves remain strong at 1.01% of loans held-for-investment. However, net income suffered from net interest margin compression due to higher costs of deposits and higher operating costs. Operating expenses increased during the quarter, largely related to higher incentive accruals, stock compensation expense and strategic initiatives for the year. Our talented team is set up to manage through a challenging environment with improved performance expected over the balance of 2023."

First Quarter 2023 Highlights include:

• Net income for the first quarter was $1,236,635 or $0.17 per diluted share compared to net income of $2,861,940 or $0.39 per diluted share in the linked quarter and net income of $2,784,297 or $0.38 per diluted share for the three months ending March 31, 2022.
• Return on Average Assets ("ROAA") was 0.51% for the quarter ended March 31, 2023, compared to 1.17% for the linked quarter and 1.29% for the three months ended March 31, 2022.
• Return on Average Equity ("ROAE") was 6.52% for the three months ended March 31, 2023, compared to 15.51% for the linked quarter and 13.53% for the three months ended March 31, 2022.
• Total Assets were $1.01 billion on March 31, 2023, an increase of $29.40 million or 2.98% from total assets on December 31, 2022.
• Loans held-for-investment increased by $10.25 million or by 1.47% during the quarter.
• Cash balances at the Federal Reserve increased by $2.54 million during the first quarter and Available for sale investment securities increased by $9.29 million during the same period.
• Uninsured deposits were 21.77% of total deposits and total available liquidity was 149.16% of uninsured deposits on March 31, 2023.
• The tangible common equity ratio (adjusted for unrealized losses on held-to-maturity securities) was at 7.38% at the end of the quarter.
• Total deposits increased by $25.97 million or by 3.06% in the first quarter. Non-interest-bearing demand deposits decreased by $16.75 million from the linked quarter to $170.67 million and represented 19.51% of total deposits on March 31, 2023.
• The net interest margin² decreased in the first quarter to 3.12%, lower by 37 basis points compared to the linked quarter and lower by 56 basis points compared to the same period in 2022. The decrease in the net interest margin across linked and calendar quarters was primarily due to an increase in funding costs.
• The cost of funds was 2.37% for the first quarter, higher by 68 basis points compared to the linked quarter and higher by 201 basis points compared to the same period in 2022, as deposit costs increased, partially offset by income from balance sheet hedges.
• Non-interest income decreased by 13.38% compared to the linked quarter and decreased by 48.21% compared to the same period in 2022. The decrease in non-interest income in the first quarter was primarily due to a drop in gain-on-sale revenue from mortgage and SBA loans, as a combination of market volatility and higher yields, led to the bank electing to retain more mortgage and SBA loans on the balance sheet.
• Non-interest expense in the first quarter increased by 19.18% compared to the linked quarter and increased by 10.18% compared to the same period in 2022. The increase in non-interest expense for linked and calendar quarters, was due to a combination of higher compensation expenses, as well as expenses related to a loan workout.
• The Efficiency Ratio³ was 78.76% for the quarter ended March 31, 2023, compared to 58.44% for the linked quarter and 61.70% for the same period in 2022. The increase in the efficiency ratio resulted from a combination of higher non-operating expenses and a decline in revenue, primarily lower net interest income, stemming from compression in the net interest margin across quarters.
• Charge offs increased in the first quarter as the bank resolved issues associated with two loans from its portfolio. In addition, the bank sold two other loans that on non-accrual, thereby reducing the level of non-performing assets. These asset sales are part of a single relationship whereby the bank was a victim of fraud. The ratio of non-accrual loans to loans held-for-investment was 0.96% on March 31, 2023, compared to 1.23% on December 31, 2022. The ratio of non-performing assets to total assets was 0.67% on March 31, 2023, compared to 0.88% on December 31, 2022.
• The Company adopted ASU 2016-13, Topic 326, Financial Instruments – Credit Losses, effective January 1, 2023. The accounting standard requires the use of the current expected credit losses methodology (CECL) for estimating allowances for credit losses. The impact to shareholders' equity, from adoption of CECL, was not material. The Company recognized a $543,000 provision for loan losses during the first quarter and the ratio of the allowance for credit losses to loans held-for-investment was 1.01% compared to 1.09% in the linked quarter.
• The Company continues to be well capitalized and capital ratios continue to be strong with a Leverage ratio of 11.30%, Common Equity Tier 1 ratio of 13.47%, Tier 1 Risk Based Capital ratio of 13.47% and a Total Capital ratio of 14.34%.

Investment Portfolio

The Company's investment portfolio is a source of liquidity, and as such is largely in available-for-sale securities and unrealized losses related to these securities are reflected in the Company's tangible equity. Moreover, if tangible equity were to be reduced by unrealized losses in held-to-maturity securities, the impact on the tangible equity ratio would be only 24 basis points. The investment portfolio helps the Company manage interest risk, and variable rate bonds comprise a significant portion of the portfolio. This has resulted in yields for the Company's investment portfolio steadily increasing for the last five quarters, and partially offsetting the increase in funding costs.

Liquidity ⁴

The Company's liquidity position remains very strong. The Company maintains high levels of total liquidity, defined as the sum of cash, cash balances at banks, unencumbered available-for-sale securities and secured borrowing availability at the Federal Reserve and the Federal Home Loan Bank.

Total deposits increased by $25.97 million or by 3.06% in the first quarter and the ratio of uninsured deposits to total deposits has been steadily declining for the last five consecutive quarters. As of March 31, 2023, the ratio of uninsured deposits to total deposits was 21.77%. The ratio of total liquidity to uninsured deposits has also been increasing steadily and was at 149.16% as of March 31, 2023. Additionally, total liquidity to unfunded commitments, CD's and Borrowings that mature in the next 30 days was at 206.92%, as of March 31, 2023.

Net Interest Income

The Company recorded net interest income of $7.20 million for the first quarter of 2023, lower by 11.32% compared to the linked quarter, and 5.45% lower than the same period in 2022. The net interest margin in the first quarter of 2023 was 3.12%, lower by 37 basis points compared to the linked quarter and lower by 56 basis points compared to the same period in 2022.

The following factors contributed to the changes in net interest margin during the first quarter of 2023 compared to the linked and calendar quarters:

• Yields on average earning assets increased to 5.38% compared to 5.11% in the linked quarter and compared to 4.01% in the calendar quarter. Higher yields on investment securities, loans and cash balances at the Federal Reserve drove the increase in yields on earning assets.
• Loan yields increased by 28 basis points to 5.75% from 5.47% in the linked quarter, while yields on investment securities increased by 23 basis points to 4.34% from 4.11% in the linked quarter. Loan yields increased by 100 basis points, while yields on investment securities increased by 189 basis points compared to the calendar quarter. Repricing of loans and securities in the higher rate environment was the primary reason for higher yields on these asset categories.
• Cost of funds increased by 68 basis points to 2.37% from 1.69% in the linked quarter, and by 201 basis points compared to the calendar quarter, due to rising rates on interest checking and money market deposit accounts and a decrease in non-interest-bearing deposits. The increase in deposit expense was partially offset by interest income from balance sheet hedges, in the form of interest rate swaps, whereby the bank pays a fixed rate and receives the Federal Funds effective rate for the duration of the swaps. The notional amount of the interest rate swaps was $50 million with a weighted average remaining term of 3.95 years, as of March 31, 2023.

Non-interest Income

Non-interest income was $941,700 for the first quarter, a decrease of 13.38% when compared to the linked quarter and a decrease of 48.21% when compared to the same period in 2022. The decrease in non-interest income in the first quarter was primarily due to a drop in gain-on-sale revenue from mortgage and SBA loans, as a combination of market volatility and higher yields, led to the bank electing to retain more mortgage and SBA loans on the balance sheet. The first quarter of the year is also a seasonally low quarter for residential mortgage originations.

Total Revenue ⁵

Total revenue, defined as the sum of net interest income, before provision for loan losses, and non-interest income, was lower by 11.56% compared to the linked quarter and lower by 13.69% compared to the calendar quarter in 2022, due to a combination of lower net interest income, resulting from net interest margin compression, as well as a decline in non-interest income stemming from reduced mortgage and SBA loan activity.

Non-interest Expenses

Non-interest expense in the first quarter increased by 19.18% compared to the linked quarter and increased by 10.18% compared to the same period in 2022. The increase in non-interest expense for linked and calendar quarters, was due to a combination of higher compensation expenses, related to incentive accruals and stock compensation, as well as costs related to loan workouts.

The Efficiency Ratio was 78.76% for the quarter ended March 31, 2023, compared to 58.44% for the linked quarter and 61.70% for the same period in 2022. The increase in the efficiency ratio resulted from a combination of higher non-operating expenses and a decline in revenue, primarily lower net interest income, stemming from compression in the net interest margin across quarters.

Income Taxes

The Company recorded a tax benefit of $51,031 in the first quarter, compared to a provision for tax expense of $664,176 for the same period in 2022. The tax benefit was primarily due to an adjustment to the deferred tax asset related to the prior year.

Asset Quality

Non-accrual loans declined in the first quarter to $6,796,262 or 0.96% of loans held-for-investment compared to $8,638,559 or 1.23% of loans held-for-investment at the end of the linked quarter. As of March 31, 2023, 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 March 31, 2023. Total non-performing assets (defined as the sum of loans on non-accrual, loans greater than 90 days past due and accruing, and OREO assets) were $6,796,262 or 0.67% of total assets as of March 31, 2023, compared to $8,638,559 or 0.88% of assets, at the end of the linked quarter.

The Company adopted ASU 2016-13, Topic 326, Financial Instruments – Credit Losses, effective January 1, 2023. The accounting standard requires the use of the current expected credit losses methodology (CECL) for estimating allowances for credit losses. The impact to shareholders' equity, from adoption of CECL, was not material. The Company recognized a provision for loan losses of $543,000 during the first quarter, compared to a provision of $327,000 during the prior quarter. The provision expense offset charge-offs for two loans and the required ACL for the remaining portfolio. The provision expense reflects a reduced requirement for HTM securities and the bank's unfunded exposure that declined during the quarter while adding $119,640 for its held-for-investment loan portfolio. The improvement in the bank's non-performing assets marks the liquidation progress in addressing the single relationship initially comprised of five loans impaired by fraud.

The Company's ACL ratio was 1.01% of loans held-for-investment (or 1.02% of loans held-for investment excluding PPP loans) as of March 31, 2023, compared to an ALLL ratio of 1.09% as of December 31, 2022 (or 1.10% of loans held-for-investment excluding PPP loans).

Total Assets

Total assets as of March 31, 2023, were $1.01 billion compared to $985.06 million as of December 31, 2022. Changes in major asset categories during linked quarters were as follows:

• Yields on average earning assets increased to 5.38% compared to 5.11% in the linked quarter and compared to 4.01% in the calendar quarter. Higher yields on investment securities, loans and cash balances at the Federal Reserve drove the increase in yields on earning assets.
• Loan yields increased by 28 basis points to 5.75% from 5.47% in the linked quarter, while yields on investment securities increased by 23 basis points to 4.34% from 4.11% in the linked quarter. Loan yields increased by 100 basis points, while yields on investment securities increased by 189 basis points compared to the calendar quarter. Repricing of loans and securities in the higher rate environment was the primary reason for higher yields on these asset categories.
• Cost of funds increased by 68 basis points to 2.37% from 1.69% in the linked quarter, and by 201 basis points compared to the calendar quarter, due to rising rates on interest checking and money market deposit accounts and a decrease in non-interest-bearing deposits. The increase in deposit expense was partially offset by interest income from balance sheet hedges, in the form of interest rate swaps, whereby the bank pays a fixed rate and receives the Federal Funds effective rate for the duration of the swaps. The notional amount of the interest rate swaps was $50 million with a weighted average remaining term of 3.95 years, as of March 31, 2023.

Total Liabilities

Total liabilities as of March 31, 2023, were $937.21 million compared to total liabilities of $910.12 million as of December 31, 2022. Total deposits were $874.97 million compared to total deposits of $848.90 million as of December 31, 2022. Non-interest-bearing demand deposits decreased by $16.75 million during the quarter and comprised 19.51% of total deposits at the end of the first quarter. Other interest-bearing demand deposits increased by $27.89 million, savings deposits were flat and time deposits increased by $13.97 million during the quarter.

The Company used excess liquidity to pay off $5 million of Federal Home Loan Bank advances during the quarter. As of the end of the first quarter, the Company had no advances from the discount window, including the Federal Reserve's Bank Term Funding Program.

Stockholders' Equity and Capital

Stockholders' equity as of March 31, 2023 was $77.26 million compared to $74.95 million as of December 31, 2022. Additional paid-in capital was $58.36 million on March 31, 2023, compared to $58.24 million as of December 31, 2022. Accumulated Other Comprehensive Income ("AOCI"), which generally comprises unrealized gains and losses on available-for-sale securities and derivative positions, improved during the first quarter of 2023. Retained earnings were $35.47 million on March 31, 2023, compared to $34.11 million at the end of the prior quarter. Total shares issued and outstanding were 7,214,466 as of March 31, 2023, compared to 7,184,259 shares as of December 31, 2022. The tangible book value of the Company's common stock on March 31, 2023, was $10.71 per share compared to $10.43 per share on December 31, 2022. Excluding AOCI losses/gains, the tangible book value of the Company's common stock on March 31, 2023, was $13.02 per share compared to $12.87 per share on December 31, 2022.

As of March 31, 2023, the Bank's capital ratios were well above regulatory minimum capital ratios for well-capitalized bank holding companies. The Bank's capital ratios as of March 31, 2023, and December 31, 2022, were as follows:

About Freedom Financial Holdings, Inc.

Freedom Financial Holdings, Inc. is the holding company of The Freedom Bank of Virginia, a community bank with locations in Fairfax, Reston, Chantilly, Vienna, and Manassas, Virginia. The Freedom Bank of Virginia also has a mortgage division headquartered in Chantilly, Virginia and an SBA division headquartered in Harrison, NY. For information about deposits, loans and other services, visit the 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 Company operates and which its loans are concentrated, including the effects of declines in real estate values, increases in unemployment levels, inflation, recessions and slowdowns in economic growth, including as a result of COVID-19 and the impact of geopolitical conflicts, such as the war between Russia and Ukraine; adverse developments in the financial services industry such as the recent bank failures; 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, wars, terrorist acts or public health events, and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company's liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth. The Company 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 Company 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.