Freedom Financial Holdings Announces Earnings for Fourth Quarter and Full Year 2022

FAIRFAX, Va. (January 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 $2,861,940, or $0.39 per diluted share, for the three months ended December 31, 2022. This compares to net income of $2,689,950 or $0.37 per diluted share, for the linked quarter and net income of $2,743,088 or $0.37 per diluted share for the three months ended December 31, 2021. Net income for the full year 2022 was $10,563,572 or $1.45 per diluted share compared to net income of $10,727,961 or $1.46 per diluted share for the full year 2021. Tangible book value per share in the fourth quarter of 2022 was higher by 4.72% from the prior quarter but was lower by 8.91% compared to the same period in 2021, primarily due to changes in Accumulated Other Comprehensive Income ("AOCI").

Joseph J. Thomas, President, and CEO, commented, "I am proud of the entire Freedom Bank team that worked diligently to deliver strong fourth quarter earnings that were higher by 6.39% compared to the prior quarter, and an increase in tangible book value per share1, excluding changes in AOCI of 13.29%, to $12.87, on December 31, 2022. Full year earnings of $10.56 million reflect our core bank's profitability, which was strong compared to the prior year, with loan growth of 21.78%, a 10-basis point increase in net interest margin2 to 3.63%, and an improvement in the efficiency ratio3 to 61.11% in 2022 from 63.14% in the prior year. These results enabled the Company to overcome a $5.2 million decline in mortgage revenue in 2022 compared to 2021, in part offset by a solid contribution from the SBA lending business which delivered an increase in gain on sale revenue of 127.94% compared to the prior year. We accomplished all of this while maintaining a strong allowance for loan losses at 1.10% of total loans (excluding PPP loans) and Tier 1 Capital Ratio at 13.37%, all of which are important as the economic environment becomes more challenging and uncertain."

Fourth Quarter and Full Year 2022 Highlights include:

• Net income for the fourth quarter was $2,861,940 or $0.39 per diluted share compared to net income of $2,689,950 or $0.37 per diluted share in the linked quarter and net income of $2,743,088 or $0.37 per diluted share for the three months ending December 31, 2021.
• Net income for the full year 2022 was lower by 1.53% compared to the full year 2021. Net income was $10,563,572 or $1.45 per diluted share compared to net income of $10,727,961 or $1.46 per diluted share for the full year 2021.
• Return on Average Assets ("ROAA") was 1.17% for the quarter ended December 31, 2022, compared to 1.15% for the linked quarter and 1.22% for the three months ended December 31, 2021. ROAA for the full year 2022 was 1.16% compared to 1.27% for the full year 2021.
• Return on Average Equity ("ROAE") was 15.51% for the three months ended December 31, 2022, compared to 13.81% for the linked quarter and 13.11% for the three months ended December 31, 2021. ROAE for the full year 2022 was 13.55% compared to 13.60% for the full year 2021.
• Total assets were $985.06 million on December 31, 2022, an increase of $108.39 million or 12.36% from total assets on December 31, 2021.
• Loans held-for-investment (excluding PPP loans) increased by $36.91 million or 5.62% during the quarter and by $124.16 million or 21.78% for the full year 2022 on continued strong portfolio loan growth.
• PPP loan balances decreased by $25.53 million during 2022 on loan forgiveness and mortgage loans held for sale decreased by $8.23 million during the year, on continued decline in mortgage activity.
• Cash balances at the Federal Reserve decreased by $18.99 million during the fourth quarter.
• Available for sale investment securities were unchanged during the fourth quarter and increased by $10.04 million in 2022.
• Total deposits increased by $10.40 million or by 1.24% in the fourth quarter and increased by $147.30 million or 20.99% for the full year 2022. Non-interest-bearing demand deposits decreased by $17.31 million from the linked quarter to $187.42 million and were lower by $34.75 million for the full year 2022 and represented 22.08% of total deposits on December 31, 2022.
• The net interest margin decreased in the fourth quarter to 3.49%, lower by 22 basis points compared to the linked quarter and lower by 25 basis points compared to the same period in 2021. 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 1.69% for the fourth quarter, higher by 77 basis points compared to the linked quarter and higher by 136 basis points compared to the same period in 2021, as deposit costs increased, partially offset by income from balance sheet hedges.
• Cost of funds was 0.89% for the full year 2022 compared to 0.40% for the full year 2021, primarily due to increased deposit costs across all deposit categories in 2022.
• Non-interest income decreased by 4.32% compared to the linked quarter and decreased by 38.31% compared to the same period in 2021. Non-interest income in the full year 2022 was lower by 41.39% compared to the prior year. The decrease in non-interest income in 2022 was primarily due to lower mortgage revenue stemming from a slowdown in mortgage activity in 2022 resulting from higher rates and tight housing inventory, compared to the prior year, as well as lower gain-on-sale revenue from SBA loans. Premiums in the secondary market were lower in 2022, which led to more SBA loan originations being retained on the balance sheet.
• Non-interest expense in the fourth quarter decreased by 3.09% compared to the linked quarter and decreased by 12.21% compared to the same period in 2021. Non-interest expenses for the full year 2022 were lower by 5.63% compared to the prior year. The decrease in non-interest expense for linked and calendar quarters, as well as the full year was primarily due to lower performance related costs, such as commissions paid to mortgage loan officers and mortgage settlement costs, as well as lower fees for legal and other professional services.
• The Efficiency Ratio was 58.44% for the quarter ended December 31, 2022, compared to 59.19% for the linked quarter and 62.62% for the same period in 2021. The efficiency ratio for the full year 2022 was 61.11% compared to 63.14% for the full year 2021.
• Credit metrics improved in the fourth quarter causing the ratio of non-performing assets to total assets to decrease to 0.88% on December 31, 2022, compared to 1.01% on December 31, 2021. Most of the Company's non-accrual loan balances comprise a single relationship and various workout solutions are currently being implemented to resolve this relationship.
• 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 Company recognized a $327,000 provision for loan losses during the fourth quarter and the ratio of the allowance for loan and lease losses to loans held-for-investment was 1.09% (or 1.10% excluding PPP loans, which carry a full faith and credit guarantee of the US Government) compared to 1.12% in the linked quarter (or 1.13% excluding PPP loans).
• The Company continues to be well capitalized and capital ratios continue to be strong with a Leverage ratio of 11.32%, Common Equity Tier 1 ratio of 13.37%, Tier 1 Risk Based Capital ratio of 13.37% and a Total Capital ratio of 14.28%.

Net Interest Income

The Company recorded net interest income of $8.11 million for the fourth quarter of 2022, lower by 1.52% compared to the linked quarter, and 1.16% higher than the same period in 2021. The net interest margin in the fourth quarter of 2022 was 3.49%, lower by 22 basis points compared to the linked quarter and lower by 25 basis points compared to the same period in 2021. The net interest margin for the full year 2022 was 3.63%, higher by 10 basis points compared to 2021.

The following factors contributed to the changes in net interest margin during the fourth quarter of 2022 compared to the linked and calendar quarters:

• Yields on average earning assets increased by 53 basis points to 5.11% compared to 4.58% in the linked quarter. Yields on average earning assets increased by 106 basis points in 2022 compared to 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 33 basis points to 5.47% from 5.14% in the linked quarter, while yields on investment securities increased by 82 basis points to 4.11% from 3.29% in the linked quarter. Loan yields increased by 36 basis points, while yields on investment securities increased by 157 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 77 basis points to 1.69% from 0.92% in the linked quarter, and by 136 basis points compared to the calendar quarter, due to rising rates on interest checking and money market deposit accounts. 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 4.20 years, as of December 31, 2022.

The following factors contributed to the changes in net interest margin during the full year 2022 compared to the prior year:

• Yields on average earning assets increased by 57 basis points to 4.47% compared to 3.90% in the prior year, driven by higher yields on loans, investments, and interest earning cash balances.
• Loan yields increased by 35 basis points to 5.03% from 4.68% in the prior year, while yields on investment securities increased by 87 basis points to 3.21% from 2.34% in the prior year.
• Cost of funds increased by 49 basis points to 0.89%, from 0.40% in the prior year, on higher deposit and borrowing costs.

Non-interest Income

Non-interest income was $1.09 million for the fourth quarter, a decrease of 4.32% when compared to the linked quarter and a decrease of 38.31% when compared to the same period in 2021. Non-interest income in 2022 was lower by 41.39% compared to the prior year. The decrease in non-interest income compared to linked and calendar quarters, as well to the prior year, was primarily due to lower mortgage revenue stemming from a slowdown in mortgage activity. Additionally, secondary market premiums for SBA loans decreased during 2022, and the Company elected to retain more SBA loans on its balance sheet instead of selling them into the secondary market.

Total Revenue⁴

Total revenue, defined as the sum of net interest income, before provision for loan losses, and non-interest income, was lower by 1.86% compared to the linked quarter and lower by 5.94% compared to the calendar quarter in 2021, primarily due to a decline in non-interest income stemming from reduced mortgage activity. Total revenue for the full year 2022 was lower by 2.49% compared to 2021, primarily due to lower non-interest income, also related to a decline in mortgage activity, compared to the prior year.

Non-interest Expenses

Non-interest expenses in the fourth quarter of 2022 decreased by 3.09% compared to the linked quarter and decreased by 12.21% compared to the same period in 2021. Non-interest expenses for the full year 2022 were lower by 5.63% compared to the prior year. The decrease in non-interest expense for linked and calendar quarters, as well as the full year was primarily due to lower performance related costs, such as commissions paid to mortgage loan officers and mortgage settlement costs, as well as lower fees for legal and other professional services.

The Efficiency Ratio was 58.44% for the quarter ended December 31, 2022, compared to 59.19% for the prior quarter and 62.62% for the same period in 2021. The Efficiency Ratio for the full year 2022 was 61.11% compared to 63.14% for 2021.

Asset Quality

• Non-accrual loans were $8,638,559 or 1.23% of loans held-for-investment as of December 31, 2022, compared to $8,677,688 or 1.31% of loans held-for-investment at the end of the linked quarter. There were no troubled debt restructurings ("TDRs") as of December 31, 2022. As of December 31, 2022, 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 December 31, 2022. 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 $8,638,559 or 0.88% of total assets as of December 31, 2022, compared to $8,677,688 or 0.90% of assets, at the end of the linked quarter. Most of the Company's non-accrual loan balances comprise a single relationship and various workout solutions are currently being implemented to resolve this relationship.

Following an assessment of the collectability of the loans held-for-investment at the end of the third quarter, it was determined that a $327,000 provision for loan losses was necessary to account for loan growth and changes to environmental factors. The Company booked a provision of $355,000 in the third quarter of 2022. The Company's ALLL ratio was 1.09% of loans held-for-investment (or 1.10% of loans held-for investment excluding PPP loans) as of December 31, 2022, compared to an ALLL ratio of 1.12% as of September 30, 2022 (or 1.13% of loans held-for-investment excluding PPP loans).

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. We do not expect that the adoption of CECL will have a material impact on the Company's allowance for credit losses.

Total Assets

Total assets as of December 31, 2022, were $985.06 million compared to $964.28 million as of September 30, 2022. Changes in major asset categories during linked quarters were as follows:

• Cash balances at the Federal Reserve and Federal Home Loan Banks decreased by $18.99 million, as the Company deployed excess liquidity to fund loan growth.
• Available for sale investment balances were flat.
• Other loans held-for investment grew by $36.91 million.
• Mortgage loans held-for-sale increased by $1.96 million.

Total Liabilities

Total liabilities as of December 31, 2022, were $910.12 million compared to total liabilities of $891.79 million as of September 30, 2022. Total deposits were $848.90 million compared to total deposits of $838.60 million as of September 30, 2022. Non-interest-bearing demand deposits decreased by $17.31 million during the quarter and comprised 22.08% of total deposits at the end of 2022. Other interest-bearing demand deposits increased by $50.90 million, savings deposits were flat and time deposits decreased by $23.12 million during the quarter. Federal Home Loan Bank advances increased by $10.00 million during the quarter.

Stockholders' Equity and Capital

Stockholders' equity as of December 31, 2022, was $74.95 million compared to $72.49 million as of September 30, 2022. Additional paid-in capital was $58.24 million on December 31, 2022, compared to $58.45 million as of September 30, 2022. Accumulated Other Comprehensive Income ("AOCI"), which generally comprises unrealized gains and losses on available-for-sale securities and derivative positions, was generally unchanged during the fourth quarter of 2022. Retained earnings were $34.11 million on December 31, 2022, compared to $31.25 million at the end of the prior quarter. Total shares issued and outstanding were 7,184,259 as of December 31, 2022, compared to 7,281,606 shares as of September 30, 2022. The tangible book value of the Company's common stock on December 31, 2022, was $10.43 per share compared to $9.96 per share on September 30, 2022, and $11.59 per share on December 31, 2021. Excluding AOCI losses/gains, the tangible book value of the Company's common stock on December 31, 2022, was $12.87 per share compared to $12.33 per share on September 30, 2022, and $11.36 per share on December 31, 2021.

In 2022, the Company repurchased 173,400 shares of its common stock, pursuant to a Board-authorized stock repurchase plan of 250,000 shares.

As of December 31, 2022, 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 December 31, 2022, and September 30, 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; 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.

Contact:
Joseph J. Thomas
President & Chief Executive Officer
703-667-4161: Phone
jthomas@freedom.bank: Email