Freedom Financial Holdings Announces Earnings for Fourth Quarter and Full Year 2023

FAIRFAX, Va. (January 26, 2024) - Freedom Financial Holdings (OTCQX: FDVA), (the "Company" or "Freedom"), the holding company for The Freedom Bank of Virginia (the "Bank") today announced a net loss of $2,006,393, or -$0.27 per diluted share for the three months ended December 31, 2023. Pre-provision pretax income1 for the fourth quarter was $2,031,758 compared to pre-provision, pretax income of $1,730,376 in the prior quarter. The Company recognized a provision for loan losses of $4,751,441 in the fourth quarter, largely related to a single relationship. This resulted in a net loss of $2,006,393, or -$0.27 per diluted share, for the three months ended December 31, 2023. This compares to net income of $1,318,378 or $0.18 per diluted share, for the linked quarter and net income of $2,861,939 or $0.39 per diluted share for the three months ended December 31, 2022. Net income for the full year 2023, was $2,318,695 or $0.32 per diluted share, compared to $10,563,572 or $1.45 per diluted share for the full year 2022. Pre-provision, pretax income for the full year 2023 was $7,909,843 compared to pre-provision, pretax income of $14,501,159 for the full year 2022. Despite the loss in the fourth quarter, tangible book value per share2 increased by 2.70% during the quarter and by 2.01% in 2023.

Joseph J. Thomas, President, and CEO, commented, "We are disappointed with the bottom-line results in the fourth quarter that were negatively impacted by the resolution of our single, legacy non-accrual relationship where we were the victim of an apparent fraud by the borrower. Given current industry trends, we also decided to take a number of proactive steps to ensure that we accelerate improvement in asset quality and earnings in 2024. However, we are encouraged by the Company's underlying operating performance in the fourth quarter that demonstrated positive momentum as we increased pre-tax pre-provision earnings by 17.4% as compared to the third quarter, driven by net interest margin expansion of 3 basis points to 2.62% and an increase in non-interest income increase of 25.62% compared to the linked quarter. As a result, and even with an after-tax loss in the quarter, we increased tangible book value per share by an annualized rate of 10.8% to $10.64 per share on December 31, 2023, aided by a reduction in AOCI in the quarter, which we expect to accelerate in 2024 based upon our proactive actions and performance trends in the fourth quarter."

Fourth Quarter and Full Year 2023 Highlights include:

• The Company posted a loss of $2,006,393 or -$0.27 per diluted share in the fourth quarter compared to net income of $1,318,378 or $0.18 per diluted share in the linked quarter and net income of $2,861,939 or $0.39 per diluted share for the three months ending December 31, 2022.
• The Company posted pre-provision, pretax income of $2,031,758 compared to pre-provision, pretax income of $1,730,376 in the prior quarter, representing an increase of 17.42% during that period. The Company recognized a provision for loan losses of $4,751,441 in the fourth quarter, largely related to a single relationship. As a result, the Company posted a loss of $2,006,393 or -$0.27 per diluted share in the fourth quarter compared to net income of $1,318,378 or $0.18 per diluted share in the linked quarter and net income of $2,861,939 or $0.39 per diluted share for the three months ending December 31, 2022.
• Net income for the full year 2023 was $2,318,695 or $0.32 per diluted share compared to net income of $10,563,572 or $1.45 per diluted share for the full year 2022.
• Return on Average Assets ("ROAA") was -0.73% for the quarter ended December 31, 2023, compared to 0.49% for the linked quarter and 1.17% for the three months ended December 31, 2022. ROAA for the full year 2023 was 0.22% compared to 1.16% for the full year 2022.
• Return on Average Equity ("ROAE") was -10.51% for the three months ended December 31, 2023, compared to 6.75% for the linked quarter and 15.51% for the three months ended December 31, 2022. ROAE for the full year 2023 was 3.01% compared to 13.55% for the full year 2022.
• Total Assets were $1.08 billion on December 31, 2023, an increase of $99.60 million or 10.11% from total assets on December 31, 2022.
• Loans held-for-investment (excluding PPP loans) increased by $13.62 million or 1.80% during the quarter and by $75.31 million or 10.85% for the full year 2023 on continued strong portfolio loan growth.
• Uninsured deposits⁵ were 25.65% of total deposits and total available secured liquidity was 130.30% of uninsured deposits on December 31, 2023.
• Tangible book value per share² increased by 2.70% during the fourth quarter and by 2.01% in 2023. The tangible common equity ratio (adjusted for unrealized losses on held-to-maturity securities) was at 7.12% at the end of the quarter.
• Total deposits decreased by $5.30 million or by 0.59% in the fourth quarter and increased by $72.06 million or 8.49% for the full year 2023. Non-interest-bearing demand deposits decreased by $24.15 million from the linked quarter to $143.96 million and were lower by $43.46 million for the full year 2023 and represented 15.63% of total deposits on December 31, 2023.
• The net interest margin³ increased in the fourth quarter to 2.62%, higher by 3 basis points compared to the linked quarter and lower by 87 basis points compared to the same period in 2022. The increase in the net interest margin across linked quarters was primarily due to increases in the yield on earning assets that more than offset the increase in funding costs during the fourth quarter.
• The cost of funds was 3.50% for the fourth quarter, higher by 14 basis points compared to the linked quarter and higher by 181 basis points compared to the same period in 2022, as deposit costs increased, partially offset by income from balance sheet hedges.
• Non-interest income increased by 25.62% compared to the linked quarter and decreased by 5.68% compared to the same period in 2022. Non-interest income in the full year 2023 was lower by 31.65% compared to the prior year. The increase in non-interest income in the fourth quarter of 2023 compared to the linked quarter was primarily due to higher operating income related to SBIC investments, while the decrease in non-interest income relative to the calendar quarter was due to lower gain-on-sale revenue from mortgage and SBA loans, as continued market volatility and higher yields, led to the Company electing to retain more mortgage and SBA loans on the balance sheet in 2023. The decrease in non-interest income in 2023 was primarily due to lower mortgage revenue stemming from a slowdown in mortgage activity in 2023 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 2023, which led to more SBA loan originations being retained on the balance sheet.
• Non-interest expense in the fourth quarter increased by 2.69% compared to the linked quarter and increased by 7.13% compared to the same period in 2022. The increase in non-interest expense for linked and calendar quarters, was primarily due to a combination of higher expenses related to legal fees and charge offs of receivables related to loans that were in workout.
• The Efficiency Ratio⁴ was 73.93% for the quarter ended December 31, 2023, compared to 76.43% for the linked quarter and 58.44% for the same period in 2022. The Efficiency Ratio for the full year 2023 was 74.56% compared to 61.11% for the full year 2022.
• Net charge offs increased in the fourth quarter and were 0.19% of average loans. The ratio of non-accrual loans to loans held-for-investment was 1.72% on December 31, 2023, compared to 1.23% on December 31, 2022. The ratio of non-performing assets to total assets was 1.22% on December 31, 2023, compared to 0.88% on December 31, 2022.
• The Company recognized a $4,751,441 provision for loan losses during the fourth quarter and the ratio of the allowance for credit losses to loans held-for-investment was 1.37% compared to 0.95% in the linked quarter. The provision and increase in non-performing assets were largely related to a single relationship.
• The Company continues to be well capitalized and capital ratios continue to be strong with a Leverage ratio of 10.26%, Common Equity Tier 1 ratio of 12.65%, Tier 1 Risk Based Capital ratio of 12.65% and a Total Capital ratio of 13.82%.

Net Interest Income

The Company recorded net interest income of $6.77 million for the fourth quarter of 2023, higher by 3.71% compared to the linked quarter, and lower by 16.62% compared to the same period in 2022. The net interest margin in the fourth quarter of 2023 was 2.62%, higher by 3 basis points compared to the linked quarter and lower by 87 basis points compared to the same period in 2022. The net interest margin for the full year 2023 was 2.77%, lower by 86 basis points compared to 2022.

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

• Yields on average earning assets increased to 5.99% compared to 5.83% in the linked quarter and 5.11% in the calendar quarter. Higher yields on investment securities and loans drove the increase in yields on earning assets.
• Loan yields increased by 9 basis points to 6.29% from 6.20% in the linked quarter, while yields on investment securities increased by 29 basis points to 5.10% from 4.81% in the linked quarter. Loan yields increased by 82 basis points, while yields on investment securities increased by 99 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 14 basis points to 3.50% from 3.36% in the linked quarter, and by 181 basis points compared to the calendar quarter, primarily due to rising rates on interest checking, money market and time 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 $80 million with a weighted average remaining term of 3.01 years, as of December 31, 2023.

The following factors contributed to the changes in net interest margin during the full year 2023 compared to the prior year:

• Yields on average earning assets increased by 126 basis points to 5.73% compared to 4.47% in the prior year, driven by higher yields on loans, investments, and interest earning cash balances.
• Loan yields increased by 104 basis points to 6.07% from 5.03% in the prior year, while yields on investment securities increased by 155 basis points to 4.75% from 3.20% in the prior year.
• Cost of funds increased by 220 basis points to 3.09%, from 0.89% in the prior year, on higher deposit and borrowing costs.

Non-interest Income

Non-interest income was $1.03 million for the fourth quarter, an increase of 25.62% when compared to the linked quarter and a decrease of 5.68% when compared to the same period in 2022. Non-interest income in 2023 was lower by 31.65% compared to the prior year. The increase in non-interest income in the fourth quarter of 2023 compared to the linked quarter was primarily due to higher operating income related to SBIC investments, while the decrease in non-interest income relative to the calendar quarter was due to lower gain-on-sale revenue from mortgage and SBA loans, as continued market volatility and higher yields, led to the Company electing to retain more mortgage and SBA loans on the balance sheet in 2023. The decrease in non-interest income in 2023 was primarily due to lower mortgage revenue stemming from a slowdown in mortgage activity in 2023 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 2023, which led to more SBA loan originations being retained on the balance sheet.

Total Revenue ⁶

Total revenue, defined as the sum of net interest income, before provision for loan losses, and non-interest income, was higher by 6.16% compared to the linked quarter and lower by 15.32% compared to the calendar quarter in 2022. The increase in revenue compared to the linked quarter was primarily due to an increase in the net interest margin and higher non-interest income during the fourth quarter. The lower revenue compared to the calendar quarter was 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 a combination of reduced mortgage and SBA loan activity and the Company electing to hold more mortgage and SBA loans on its balance sheet in 2023.

Total revenue for the full year 2023 was lower by 16.63% compared to 2022, primarily due to margin compression related to higher funding costs and lower non-interest income, also related to a decline in mortgage activity and the Company electing to hold more mortgage and SBA loans on its balance sheet, compared to the prior year.

Non-interest Expense

Non-interest expense in the fourth quarter increased by 2.69% compared to the linked quarter and increased by 7.13% compared to the same period in 2022. The increase in non-interest expense for linked and calendar quarters, was primarily due to a combination of higher expenses related to legal fees and charge offs of receivables related to loans that were in workout. Non-interest expense for the full year 2023 were higher by 1.72% compared to the prior year.

The Efficiency Ratio was 73.93% for the quarter ended December 31, 2023, compared to 76.43% for the linked quarter and 58.44% for the same period in 2022. The Efficiency Ratio for the full year 2023 was 74.56% compared to 61.11% for the full year 2022.

Asset Quality

Non-accrual loans increased in the fourth quarter to $13,209,892 or 1.72% of loans held-for-investment compared to $6,947,841 or 0.92% of loans held-for-investment at the end of the linked quarter. As of December 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 December 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 $13,209,892 or 1.22% of total assets as of December 31, 2023, compared to $6,947,841 or 0.66% of total assets, at the end of the linked quarter.

Following an assessment of the collectability of the loans held-for-investment at the end of the fourth quarter, it was determined that a $4,751,441 provision for loan losses was necessary due to apparent fraud and collateral deficiencies on one large non-accrual relationship and to account for loan growth and changes to environmental factors. The Company booked a provision of $205,000 in the third quarter of 2023.

With respect to the non-accrual relationship, the bank provided five loans amounting to more than $9.0 MM to the borrower for two businesses and one commercial real estate property starting in January 2020, the largest of which is an office building in Suitland, Maryland. A protracted debtor interrogatory process was exacerbated by a bankruptcy petition that was recently dismissed, misappropriation of funds, material misrepresentations and inaccurate documents.

Only two loans remain following the sale of related collateral, one of the loans has a pending sales contract on underlying collateral, and the remaining loan is undergoing a substitute trustee sale of the office building. In the fourth quarter, we charged off $1,103,015 related to deficiencies in collateral sales of the business loans and recorded a specific reserve of $2,627,748 related to the real estate loan in advance of the trustee sale. We have taken appropriate steps as a bank with respect to our rights under these loans and have also filed notice of a potential claim with our Fidelity Bond provider.

The Company's ratio of Allowance for Credit Losses to loans held-for-investment was 1.37% as of December 31 2023, compared to the ratio of Allowance for Loan and Lease Losses to loans held-for-investment of 1.09% as of December 31, 2022.

Total Assets

Total assets as of December 31, 2023, were $1.08 billion compared to $1.06 billion on September 30, 2023, and total assets of $985.06 million on December 31, 2022. Changes in major asset categories since December 31, 2022, were as follows:

• Interest bearing deposits at banks decreased by $10.87 million on funding of strong loan growth.
• Available for sale investment balances increased by $29.70 million.
• Other loans held-for investment grew by $75.31 million

Total Liabilities

Total liabilities as of December 31, 2023, were $1,007.44 million compared to total liabilities of $983.40 million on September 30, 2023, and $910.12 million on December 31, 2022. Total deposits were $921.06 million on December 31, 2023, compared to $926.36 million on September 30, 2023, and total deposits of $848.90 million as of December 31, 2022. Non-interest-bearing demand deposits decreased by $24.15 million during the fourth quarter and comprised 15.63% of total deposits at the end of the fourth quarter. Other interest-bearing demand deposits increased by $20.14 million, savings deposits were relatively unchanged and time deposits decreased by $1.36 million during the quarter. Federal Home Loan Bank borrowings increased by $15 million during the quarter as did borrowings from the Federal Reserve Bank of Richmond.

Stockholders' Equity and Capital

Stockholders' equity as of December 31, 2023 was $77.23 million compared to $75.57 million on September 30, 2023, and $74.95 million as of December 31, 2022. The increase was due to Accumulated Other Comprehensive Income ("AOCI"), which generally comprises unrealized gains and losses on available-for-sale securities and derivative positions. AOCI increased during the fourth quarter of 2023 due to a decline in unrealized losses related to available-for-sale securities. The tangible book value of the Company's common stock on December 31, 2023, was $10.64 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 December 31, 2023, was $13.09 per share compared to $12.87 per share on December 31, 2022.

As of December 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 December 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 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 in 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.

Contact:

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