The Freedom Bank of Virginia Announces Earnings for the Third Quarter of 2020

FAIRFAX, Va. (October 30, 2020) – The Freedom Bank of Virginia (OTCQX: FDVA), (the “Bank” or “Freedom”) today announced net income of $2,575,370, or $0.35 per diluted share, for the three months ended September 30, 2020. This compares to net income of $1,525,525 or $0.21 per diluted share, for the prior quarter and net income of $932,348 or $0.13 per diluted share for the three months ending September 30, 2019. The Bank reported net income of $4,950,701 or $0.68 per diluted share for the nine months ended September 30, 2020 compared to net income of $1,957,409 or $0.27 per diluted share for the nine months ended September 30, 2019.

Joseph J. Thomas, President and CEO, commented “Despite the challenging headwinds of COVID-19 and the adverse economic environment, Freedom Bank was able to push forward with third quarter Return on Average Assets of 1.45% and Return on Average Equity of 14.89%, resulting in an 17.91% annualized increase in our tangible book value per share to $9.75 in the third quarter. Stronger earnings were driven by a 54.64% increase in non-interest revenue tied to the success of our mortgage division as well as disciplined control on deposit and overhead costs. The Bank’s third quarter efficiency ratio of 69.22% compares to an efficiency ratio of 81.39% for the comparable period in 2019. Our asset quality remains pristine with total non-performing assets down again to $3.69 million or 0.49% of total assets at September 30, 2020 and we did not require any addition to our reserve for loan losses, which was 1.32% to loans held-for-investment, excluding PPP loans as of September 30, 2020. We also opened a new Sales Office in Manassas to expand the bank’s foot print into Prince William County and our team continues to work tirelessly on behalf of clients, serving to build our core client portfolio of entrepreneurs and small businesses.”

Third Quarter Highlights include:

• Net income increased by 68.82% compared to the prior quarter and by 176.22% compared to the same period in 2019. Net income for the third quarter was $2,575,370 or $0.35 per diluted share compared to net income of $1,525,505 or $0.21 per diluted share in the prior quarter and net income of $932,348 or $0.13 per diluted share for the three months ended September 30, 2019;
• Net income for the first nine months of 2020 increased by 152.92% compared to the same period in 2019. Net income was $4,950,701 or $0.68 per diluted shares, compared to net income of $1,957,409 or $0.27 per diluted share for the same period in 2019;
• Return on Average Assets (“ROAA”) was 1.45% for the quarter ended September 30, 2020 compared to 0.92% for the prior quarter and 0.75% for the three months ended September 30, 2019;
• Return on Average Equity (“ROAE”) was 14.89% for the three months ended September 30, 2020 compared to 9.24% for the prior quarter and 6.34% for the three months ended September 30, 2019;
• Total assets were $751.58 million on September 30, 2020, an increase of $251.19 million from December 31, 2019;
• Total loans increased by $26.43 million or by 4.84% during the quarter, while loans held-for-inve4stment declined by $9.25 million or by 1.79% during the quarter. Mortgage loans held-for-sale increased by $35.67 million or by 111.86% while PPP loan balances increased by $2.76 million, offset by a decrease of $12.01 million in other loans held-for-investment during the quarter;
• Loan payment deferrals related to COVID-19 continue to decline steadily. In the second quarter of 2020, in accordance with the spirit and provisions of the CARES Act, the Bank allowed borrowers who had been impacted by the COVD-19 pandemic, to defer loan payments for six months. Based upon a review of earnings releases, it appears that many other banks chose, instead, to provide shorter payment deferrals of up to 3 months to similarly impacted borrowers. As a result, the payment deferrals granted in the second quarter had longer terms that end in the fourth quarter of 2020. During the third quarter of 2020, 15 of the loans that had been granted payment deferrals in the prior quarter had resumed contractual payments, while 9 additional loans were granted payment deferrals in the third quarter. Interest continues accruing during the deferral period. As of September 30, 2020, 90 loans for a total of $73.07 million were on payment deferrals, all of which will end in the fourth quarter. This compares to 96 loans or $89.35 million on June 30, 2020;
• Investment securities increased by $21.52 million during the third quarter;
• Total deposits increased by $46.97 million or by 9.63% in the third quarter. Non-interest bearing demand deposits increased by $22.39 million to $176.22 million and represented 32.95% of total deposits at the end of the quarter;
• The net interest margin increased in the third quarter to 3.13%, higher by 20 basis points compared to the previous quarter and lower by 39 basis points compared to the same period in 2019. The improvement in the net interest margin across linked quarters was primarily due to a reduction in the cost of funds, accompanied by higher yields on earning assets. Excluding PPP loans, the net interest margin would have been higher by 9 basis points to 3.22% during the third quarter;
• The cost of funds was 0.73% for the third quarter, lower by 15 basis points compared to the previous quarter and lower by 91 basis points compared to the same period in 2019, as deposit and borrowing costs continue to decline across the board;
• Non-interest income increased by 54.64% compared to the previous quarter and increased by 175.14% compared to the same period in 2019, primarily due to higher revenue from the sale of mortgage loans and higher income from Bank Owned Life Insurance;
• Revenue, defined as the sum of net interest income, before provision for loan losses, and non-interest income, increased by 29.84% compared to the prior quarter, and by 71.53% compared to the same period in 2019;
• Non-interest expense increased by 32.23% compared to the previous quarter and increased by 45.87% compared to the same period in 2019, primarily due to higher performance based compensation and mortgage costs: specifically, an increase in commissions paid to mortgage loan officers and mortgage settlement costs as well as higher accruals for performance based compensation. Excluding these costs, non-interest expense in the third quarter of 2020 increased by $340,160 or by 9.06%, compared to the previous quarter and increased by 6.06% compared to the same period in 2019;
• The Efficiency Ratio was 69.22% for the quarter ended September 30, 2020, compared to 67.97% for the prior quarter and 81.39% for the same period in 2019;
• As a result of a decline in loans held-for-investment during the quarter and an assessment of the risks in the held-for-investment loan portfolio, the Bank did not recognize any provision for loan losses during the third quarter and the ratio of the allowance for loan and lease losses to loans held-for-investment increased to 1.04% (or 1.32% excluding PPP loans, which carry a full faith and guarantee by the US Government) compared to 1.02% in the previous quarter (or 1.28% excluding PPP loans);
• The Bank continues to be well capitalized and capital ratios continue to be strong with a Leverage ratio of 11.57%, Common Equity Tier 1 ratio of 14.10%, Tier 1 Risk Based Capital ratio of 14.10% and a Total Capital ratio of 15.17%.

Net Interest Income

The Bank recorded net interest income of $5.32 million for the third quarter of 2020, an increase of 12.66% compared to the previous quarter, and 26.32% higher than the same period in 2019. The net interest margin in the third quarter of 2020 was 3.13%, higher by 20 basis points compared to the previous quarter and lower by 39 basis points compared to the same period in 2019. Excluding PPP loans, the net interest margin would have been higher by 9 basis points to 3.22% during the third quarter.

The following factors contributed to the changes in net interest margin during the third quarter of 2020 compared to the previous quarter:

• Yields on average earning assets increased by 6 basis points to 3.81% compared to 3.75% in the previous quarter, primarily due to higher yields on investment securities, partially offset by lower loan yields.
• Loan yields decreased by 25 basis points to 4.10% from 4.35% in the previous quarter, while yields on investment securities increased by 81 basis points to 3.32% from 2.51% in the previous quarter. Loan growth in the third quarter was largely concentrated in lower yielding residential mortgage loans held-forsale and PPP loans, with a decrease in other loans held-for-investment as a result of payoff activity.
• Cost of funds decreased by 15 basis points to 0.73%, from 0.88% in the previous quarter, primarily due to declines in deposit and borrowing costs across the board.

The following factors contributed to the changes in net interest margin during the third quarter compared to the same period in 2019:

• Loan yields decreased by 126 basis points to 4.10% from 5.36% in the third quarter of 2019, while yields on investment securities increased by 53 basis points to 3.32%, from 2.79% in the same period in 2019.
• Cost of funds decreased by 91 basis points to 0.73%, from 1.64% in the third quarter of 2019, primarily due to higher non-interest bearing deposits and lower costs related to borrowings and interest bearing deposits.

Non-interest Income

Non-interest income was $5.05 million for the third quarter, higher by 54.64% compared to the previous quarter and higher by 175.14% compared to the same period in 2019. The principal contributor to the increase in noninterest income in the third quarter of 2020 compared to the previous quarter was higher gain-on-sale and fee revenue from mortgage loans, stemming from an increase in mortgage refinancing activity. Other factors that contributed to the increase in non-interest income was higher income from Bank Owned Life Insurance.

Non-interest Expenses

Non-interest expenses in the third quarter of 2020 increased by 32.23% compared to the previous quarter and increased by 45.87% compared to the same period in 2019. The increase was largely driven by higher performance based compensation and mortgage costs: specifically, increased commissions paid to mortgage loan officers and an increase in mortgage settlement costs on higher closed loan volume during the quarter, as well as increased accruals for performance based compensation. Excluding these costs, non-interest expense in the third quarter of 2020 increased more modestly, by $340,160 or by 9.06%, compared to the previous quarter and increased by 6.06% compared to the same period in 2019.

Additional categories of non-interest expenses that changed in the third quarter of 2020 were the following:

• Professional fees were lower by 15.68% in the third quarter of 2020 compared to the previous quarter.
• Data processing expenses in the third quarter were lower by 19.51% compared to the previous quarter.
• Advertising expenses in the third quarter of 2020 increased relative to the previous quarter on higher media advertising.

The Efficiency Ratio was 69.22% for the quarter ended September 30, 2020, compared to 67.97% for the prior quarter and 81.39% for the same period in 2019.

The Efficiency ratio for the first nine months of 2020 was 70.58% compared to 85.07% for the same period in 2019.

Asset Quality

Non-accrual loans were $3.69 million or 0.64% of total loans at the end of the third quarter of 2020, compared to $3.97 million or 0.71% of total loans at the end of the prior quarter. There were no troubled debt restructurings (“TDRs”) as of September 30, 2020. On September 30, 2020, there were no loans that were 90 days or more past due and accruing compared to one loan with a book balance of $80,000 that was 90 days or more past due and accruing, equivalent to 0.01% of total loans on June 30, 2020. There was no Other Real Estate Owned (“OREO”) on the balance sheet as of September 30, 2020. Total non-performing assets (defined as the sum of loans on nonaccrual, loans greater than 90 days past due and accruing, loans that are TDRs but not on non-accrual, and OREO assets) were $3.69 million or 0.49% of total assets at September 30, 2020 compared to $3.97 million or 0.57% of total assets, at the end of the previous quarter.

Loan payment deferrals related to COVID-19 continue to decline steadily. In the second quarter of 2020, in accordance with the spirit and provisions of the CARES Act, the Bank allowed borrowers who had been impacted by the COVD-19 pandemic, to defer loan payments for six months. Based upon a review of earnings releases, it appears that many other banks chose, instead, to provide shorter payment deferrals of up to 3 months to similarly impacted borrowers. As a result, the payment deferrals granted in the second quarter had longer terms that end in the fourth quarter of 2020. During the third quarter of 2020, 15 of the loans that had been granted payment deferrals in the prior quarter had resumed contractual payments, while 9 additional loans were granted payment deferrals in the third quarter. Interest continues accruing during the deferral period. As of September 30, 2020, 90 loans for a total of $73.07 million were on payment deferrals, all of which will end in the fourth quarter. This compares to 96 loans or $89.35 million on June 30, 2020.

The table above shows the Bank’s loans to certain industry sectors that are likely to be most impacted by the COVID19 outbreak and therefore deemed higher risk. These industry sectors include retail, restaurants, fitness centers, hotels, and churches. As of September 30, 2020, the Bank had $40.71 million of outstanding loans to these industry sectors, representing 3.11% of loans held-for-investment (or 3.95% of loans held-for-investment excluding PPP loans). Loan deferrals were $15.69 million or 38.54% of outstanding loans to borrowers in these higher risk industry sectors.

Following an assessment of the collectability of the loans held-for-investment at the end of the third quarter, it was determined that no provision for loan losses was necessary. The Bank booked a provision of $705,000 in the second quarter of 2020. The Bank’s ALLL ratio was 1.04% of loans held-for-investment (or 1.32% of loans held-for investment excluding PPP loans) as of September 30, 2020 compared to an ALLL ratio of 1.02% at June 30, 2020 (or 1.28% of loans held-for-investment excluding PPP loans).

Total Assets

Total assets at September 30, 2020 were $751.58 million compared to $697.75 million on June 30, 2020. Changes in major asset categories during linked quarters were as follows:

• Investment securities increased by $21.52 million, including $16.45 million in municipal bonds classified as held-to-maturity, as the bank deployed excess liquidity into investments.
• Loans held-for-investment decreased by $9.25 million, including PPP loan growth of $2.76 million and a decrease in $12.01 million of other loans held-for-investment.

Total Liabilities

Total liabilities at September 30, 2020 were $681.05 million compared to total liabilities of $630.20 million on June 30, 2020. Total deposits were $534.87 million compared to total deposits of $487.90 million on June 30, 2020. On a linked quarter basis, interest bearing demand deposits increased by $28.67 million, with the bulk of the increase occurring in low cost interest checking and money market balances, while time deposits declined by $3.61 million. Non-interest bearing demand deposits increased during the quarter as well to $176.22 million, and comprised 32.95% of total deposits at the end of the quarter, compared to 31.53% of total deposits on June 30, 2020. The change in funding mix enables the Bank’s cost of funds to benefit from lower interest rates. Federal Home Loan Bank advances declined slightly during the quarter, while PPP Liquidity Facility term advances increased as we funded the PPP loan growth that occurred in the third quarter.

Stockholders’ Equity and Capital

Stockholders’ equity at September 30, 2020 was $70.53 million compared to $67.55 million on June 30, 2020. Additional paid in capital at September 30, 2020 was $58.84 million on September 30, 2020 compared to $58.75 million on June 30, 2020. Accumulated Other Comprehensive Income (“AOCI”), which generally comprises unrealized gains and losses on available-for-sale securities on the balance sheet, increased by $316,441 on unrealized gains during the third quarter of 2020. Total shares issued and outstanding were 7,233,751 on September 30, 2020 compared to 7,238,751 shares on June 30, 2020, and 7,211,046 shares on September 30, 2019. The tangible book value of the Bank’s common stock at September 30, 2020 was $9.75 per share compared to $9.33 per share on June 30, 2020 and $8.76 per share on September 30, 2019.

As of September 30, 2020 of the Bank’s capital ratios were well above regulatory minimum capital ratios for wellcapitalized banks. The Bank’s capital ratios on September 30, 2020 and December 31, 2019 were as follows:

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.

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