Freedom Bank of Virginia
Annual Report 2009

Plain-text annual report

Annual Report 2009  TABLE OF CONTENTS MANAGEMENT DISCUSSION PAGE 1-2 INDEPENDENT AUDITORS’ REPORT 3 FINANCIAL STATEMENTS Balance Sheets Statements of Operations Statements of Changes in Stockholders’ Equity Statements of Cash Flows Notes to Financial Statements BOARD OF DIRECTORS & SENIOR MANAGEMENT DIRECTORS EMERITUS, ADVISORY BOARD & GOVERNMENT CONTRACTING COUNCIL OFFICERS & STAFF COMMERCIAL ACCOUNT SERVICES PERSONAL ACCOUNT SERVICES 4 5 6 7 8-24 25 26 27-28 29 30 MANAGEMENT DISCUSSION Describing the year 2009 is like writing two stories with opposite story lines and outcomes. The final three quarters of 2009 is certainly much easier to describe than the first quarter. The Bank earned $874,198 in the last three quarters of 2009, but in the first quarter it had to make a loan loss provision of $3,810,744 which in turn led to a net operating loss of $4,504,734 for the first quarter and a loss of $3,630,535 for the year. The Provision in the first quarter was recognized due to the deterioration in the economy and rising unemployment in general, and specifically in recognition of decreased value of real property. Real estate values in Northern Virginia were lower due to the effect of the recession and increased unemployment which started with the sub-prime loan collapse and the burst of the residential real estate “bubble”. The Bank never engaged in sub-prime or alternate lending practices; however real estate sales slowed, inventory of unsold houses increased and real estate loan collateral values decreased. Numerous builders and residential developers ran out of cash to carry their projects during slow periods and the Bank experienced increased loan delinquency and foreclosures. Bank officers monitored the credit quality of the loan portfolio closely and worked diligently to reduce the amount of non-performing assets. Since the end of the first quarter, credit quality has improved, delinquencies have decreased and several loan problems have been resolved. Residential real estate values have begun increasing again, existing home sales have improved. Construction of new homes has not improved enough to absorb the overhang of residential building lots but we hope to see signs of improvement in 2010. Other Real Estate Owned (OREO) was reduced to zero by the end of 2009 reflecting the effort to resolve credit problems. The second quarter of 2009 begins the change in the story line to a more favorable outcome. The Bank returned to profitability at the beginning of the second quarter and reported Net Income of $104,523 for the whole quarter. The Third Quarter of 2009 produced Net Income of $238,304, and finally, reported Net Income of $531,371 for the Fourth Quarter of 2009, the third consecutive quarter of increased profitability. The second, third and fourth quarter total net income was $874,198, the best three quarters of the Bank’s history. Two reasons which are readily apparent for the Bank performance may be seen by reviewing the balance sheet. They are the increase in loans outstanding and the increase in total deposits. Loans outstanding increased $13,938,601 between December 31, 2008 and December 31, 2009 and ended the period at $135,400,086. Total Deposits increased $16,531,342 and ended the year at $137,431,805. A sub-component of total deposits is non-interest bearing demand deposits which increased $8,138,589 and at December 31, 2009 totaled $27,796,586. This growth, in a very challenging year, brought loans outstanding above the breakeven level we have discussed frequently since the expansion plan was implemented in the middle of 2007. Turning to the Statement of Operations, interest income increased to $8.2 million from $7.7 million but when looking at the component parts of interest income, both investment securities income and Fed Funds sold income decreased along with market rates while interest and fees on loans increased $1 million resulting from increased volume of loans outstanding. Interest Expense decreased to $2,879,159 from $3,297,216 continuing the trend of lower interest rates. Even though interest expense decreased, the volume of deposits increased to $137,431,805 as of December 31, 2009 from $120,900,463. Interest Expense, calculated as an annualized percentage of deposits on the last day of the year was 2.09% at December 31, 2009 compared to 2.73% as of December 31, 2008. The Provision for Possible Loan Losses was $4,435,744 for the entire 2009 year. In 2008, the Provision was $1,865,000. Of the total Provision, $3,810,744 was taken in the first quarter 2009. Other Income from service charges increased to $572,448 for the year 2009 compared to $309,930 for 2008. Gain on sale of other real estate owned totaled $462,621. There were no comparable gains in 2008. Total Operating Expenses increased to $5,550,037 during 2009 from $5,047,824 in 2008. The combination of these factors, increased loan volume, increased interest on loans, decreased interest expense on deposits, increased loan loss provision, increased other income and gain on other real estate sales, resulted in a Net Loss of $3,630,535 for the whole year. However, the loss provision was largely a first quarter event, the since the first quarter the Bank has returned to profitability, with the final three quarters combined to total $874,198 in Net Income. Freedom Bank capital remains strong with all capital ratios remaining above the “Well Capitalized” regulatory ratios. As of December 31, 2009, Freedom Bank had a 12.03% Tier 1 Leverage Ratio, more than twice the ratio considered by regulators to be “Well Capitalized.” Tier 1 Risk Based Capital Ratio was 14.08% and likewise, this ratio was more than twice the regulatory definition of “Well Capitalized.” The Tier 2 Risk Based Capital Ratio is 15.34%. “Well Capitalized” is above 10%. This report is a bit longer than usual but the 2009 year was, as stated at the beginning of the letter, two different stories in one year with better results occurring more recently. With all of challenges of 2009, we remained focused and did not slow down our efforts to provide a high level of customer service. Your Bank continued to invest in new products and services necessary to keep us competitive with other financial institutions in our area. For our business clients, corporate credit cards are now available. We also expanded our commercial remote capture product which has been highly successful and allows businesses the capability of depositing checks received from their customers directly from their own office computers. Deposits can be made beyond traditional banking hours and on weekends. Beginning in June 2009, the bank introduced “e-statements” for both commercial and consumer clients. “E- Statements” are available days sooner than mailed statements and allows us to help the environment by going “green” and saving on paper. In October of 2009, the Bank switched to “branch capture” for the processing of checks deposited at the teller line which extended the cut-off time for deposits from 2 pm to 4 pm. Regrettably in July 2009, the board of directors lost a valuable colleague with the death of director Russell E. (Ted) Sherman. Mr. Sherman had been a director with our Bank since February 2007. He served as Chairman of the Bank’s Compensation Committee and was a member of the director’s Loan Committee. The board valued his advice, expertise and commitment. He was a great asset to our Bank and will be greatly missed by everyone. As always, we thank you for your continued support and dedication. The directors, senior management and staff are dedicated and working diligently to maintain profitability in 2010 as we saw during the last three quarters of 2009. Richard C. Litman Chairman of the Board John T. Rohrback President & CEO 2 INDEPENDENT AUDITORS’ REPORT To the Board of Directors and Stockholders The Freedom Bank of Virginia Vienna, Virginia We have audited the accompanying balance sheets of The Freedom Bank of Virginia as of December 31, 2009 and 2008, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Freedom Bank of Virginia as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Fairfax, Virginia March 4, 2010 4035 Ridge Top Road, #700, Fairfax, Virginia 22030 (703) 385-8888 Fax (703) 385-3940 10694-A Crestwood Drive, Manassas, Virginia 20109-3497 (703) 368-3533 Fax (703) 361-1958 www.tgccpa.com Member of American Institute of Certified Public Accountants Division for CPA Firms 3 BALANCE SHEETS DECEMBER 31, 2009 AND 2008 ASSETS Cash and due from banks Federal funds sold Securities available-for-sale Securities held-to-maturity Federal Reserve Bank stock, at cost Loans receivable Allowance for possible loan losses Net Loans Bank premises and equipment, net Accrued interest receivable Other real estate owned Other assets Total Assets LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities Demand deposits Non-interest bearing Interest bearing Savings deposits Time deposits Total Deposits Other accrued expenses Accrued interest payable Total Liabilities Stockholders' Equity THE FREEDOM BANK OF VIRGINIA 2009 2008 $ 1,375,127 10,824,000 4,631,602 $ 1,184,600 11,487,000 2,592,145 4,032,860 556,400 7,118,270 712,800 135,400,086 121,461,485 (1,907,853) (2,276,824) 133,492,233 429,828 119,184,661 535,648 483,510 418,545 - 705,329 1,456,147 261,374 $ 157,281,707 $ 144,200,372 $ 27,796,586 $ 19,657,997 16,257,975 14,161,811 660,759 519,205 92,716,485 86,561,450 137,431,805 120,900,463 699,778 391,416 91,096 203,169 138,222,679 121,495,048 Common stock, $5 par value, 5,000,000 shares authorized: 2,357,361 shares issued and outstanding, 2009 & 2008 11,786,805 11,786,805 Additional paid-in capital Accumulated other comprehensive income 16,002,413 16,002,413 44,133 59,894 Retained earnings (deficit) (8,774,323) (5,143,788) Total Stockholders' Equity 19,059,028 22,705,324 Total Liabilities and Stockholders' Equity $ 157,281,707 $ 144,200,372 4 The Notes to Financial Statements are an integral part of these statements. STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 2009 AND 2008 Interest Income Interest and fees on loans Interest on investment securities Interest on Federal funds sold THE FREEDOM BANK OF VIRGINIA 2009 2008 $ 7,655,791 $ 6,672,194 518,444 786,168 25,101 226,488 Total Interest Income 8,199,336 7,684,850 Interest Expense Interest on deposits Net Interest Income Provision for Possible Loan Losses Net Interest Income after Provision for Possible Loan Losses Other Income Service charges and other income Gain on sale of other real estate owned 2,879,159 3,297,216 5,320,177 4,387,634 4,435,744 1,865,000 884,433 2,522,634 572,448 309,930 - 462,621 Total Other Income 1,035,069 309,930 Operating Expenses Officers and employee compensation and benefits Occupancy expense Equipment and depreciation expense Insurance expense Professional fees Data and item processing Business development Franchises tax Other operating expenses 3,011,968 2,848,087 489,678 503,075 242,436 230,639 78,421 276,562 161,214 701,280 436,879 466,695 113,784 69,271 220,144 160,302 234,284 353,142 Total Operating Expenses 5,550,037 5,047,824 Loss before Income Taxes (3,630,535) (2,215,260) Provision for Income Taxes - - Net Loss $ (3,630,535) $ (2,215,260) Net Loss Per Common Share (1.54) (0.94) Net Loss Per Diluted Share (1.54) (0.94) The Notes to Financial Statements are an integral part of these statements. 5 STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA Shares Additional Comprehensive of Common Common Stock Stock Paid-In Capital Income (Deficit) Retained Earnings (Deficit) Total Stockholders' Equity Accumulated Other Balance, December 31, 2007 2,357,361 $ 11,786,805 $ 15,980,422 $ 45,808 $ (2,928,528) $ 24,884,507 Comprehensive Income (Loss): Net Loss Change in unrealized gain (loss) on securities available- for-sale, net of tax of $7,585 Total Comprehensive Income (Loss) Stock based compensation - - - - - - (2,215,260) (2,215,260) - - 14,086 - 14,086 - 21,991 - - 21,991 (2,201,174) Balance, December 31, 2008 2,357,361 11,786,805 16,002,413 59,894 (5,143,788) 22,705,324 Comprehensive Income (Loss): Net Loss Change in unrealized gain (loss) on securities available- for-sale, net of tax of $8,486 Total Comprehensive Income (Loss) - - - - - (3,630,535) (3,630,535) - - (15,761) - (15,761) (3,646,296) Balance, December 31, 2009 2,357,361 $ 11,786,805 $ 16,002,413 $ 44,133 $ (8,774,323) $ 19,059,028 6 The Notes to Financial Statements are an integral part of these statements. STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2009 AND 2008 Cash Flows from Operating Activities Net loss Noncash items included in net loss Depreciation and amortization Provision for possible loan losses Net amortization (accretion) of securities Stock-based compensation expense Gain on other real estate (Increase) Decrease in Accrued interest receivable Other assets Increase (Decrease) in Other accrued expenses Accrued interest payable Net Cash Used by Operating Activities Cash Flows from Investing Activities Federal funds sold, net Loan originations, net Purchase of available-for-sale securities Purchase of held-to-maturity securities Maturities, calls and paydowns of securities available-for-sale Paydowns of held-to-maturity securities Purchase of Federal Reserve Bank stock Proceeds from sale of other real estate Proceeds from redemption of Federal Reserve Bank stock Acquisition of bank equipment Net Cash Used by Investing Activities THE FREEDOM BANK OF VIRGINIA 2009 2008 $ (3,630,535) $ (2,215,260) 183,080 166,947 4,435,744 1,865,000 27,848 (21,126) 21,991 - - (462,621) (64,965) (47,279) (1,194,773) (79,293) 97,331 316,849 (112,073) 107,197 (517,579) (88,359) 663,000 (1,487,000) (19,826,199) (54,739,248) (3,935,363) (2,000,000) (986,509) - 9,470,126 1,836,526 873,900 3,092,694 - (10,800) - 2,250,833 167,200 35,350 (61,127) (216,754) (15,823,236) (49,050,135) Cash Flows from Financing Activities Increase in deposits, net Net Cash Provided by Financing Activities 16,531,342 48,862,321 16,531,342 48,862,321 Net Increase (Decrease) in Cash and Due from Banks 190,527 (276,173) Cash and Due from Banks, beginning of year 1,184,600 1,460,773 Cash and Due from Banks, end of year $ 1,375,127 $ 1,184,600 Noncash Investing Activity Unrealized (loss) gain on securities available-for-sale, net Transfer of loans to other real estate owned $ (15,761) $ 14,086 $ 705,329 $ 1,082,883 Supplemental Information Cash paid during the year for interest $ 2,991,232 $ 3,190,019 Cash paid during the year for income taxes $ - $ - The Notes to Financial Statements are an integral part of these statements. 7 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA 1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accounting and reporting policies of The Freedom Bank of Virginia conform to generally accepted accounting principles and reflect practices of the banking industry. The policies are summarized below. Nature of Operations The Freedom Bank of Virginia (the Bank) is a state chartered bank and a member of the Federal Reserve and is subject to the rules and regulations of the Virginia State Banking Commission, the Federal Reserve and the Federal Deposit Insurance Corporation. The Bank provides banking services at its branch offices in Vienna and Fairfax, Virginia, and serves customers primarily in the Northern Virginia area. The Bank was in organization during the period January 27, 2000 through July 22, 2001, and opened for business on July 23, 2001. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The determination of the adequacy of the allowance for loan losses is based on estimates that are particularly susceptible to significant changes in the economic environment and market conditions. In connection with the determination of the estimated losses on loans, management obtains independent appraisals for significant collateral. Securities Debt securities are classified as held-to-maturity when the Bank has the positive intent and ability to hold the securities to maturity. Securities held-to-maturity are carried at amortized cost. Debt securities not classified as held-to-maturity or trading securities are classified as available-for- sale. Securities available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income. Realized gains (losses) on securities available-for-sale are included in other income (expense) and, when applicable, are reported as a reclassification adjustment, net of tax, in other comprehensive income. The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Gains and losses on sales of securities are recorded on the trade date and are determined using the specific-identification method. Federal Reserve Bank stock is considered a restricted investment security, is carried at cost and evaluated annually for impairment. 8 NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 2009 AND 2008 Loans and Loan Fees THE FREEDOM BANK OF VIRGINIA Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at the principal amount outstanding, less the allowance for loan losses and net deferred loan fees. Interest on loans is generally computed using the simple interest method. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on non-accrual status. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent unless the credit is well secured and in process of collection. Other personal loans are typically charged off no later than 180 days past due. In all cases, loans are placed on non- accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Loans Held for Sale Loans held for sale consist primarily of residential mortgage loans, which are secured by one-to-four family residential real estate. Loans held for sale are carried at the lower of aggregate cost, net of purchase discounts or premiums, deferred fees, and deferred origination costs, or fair value. The Bank determines the fair value of loans held for sale using current secondary market prices for loans with similar coupons, maturities and credit quality. The fair value of mortgage loans is subject to change primarily due to changes in market interest rates. Loans held for sale totaled approximately $390,000 and $487,000 as of December 31, 2009 and 2008, respectively, and are included in loans receivable in the financial statements. Allowance for Loan Losses The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb credit losses inherent in the loan portfolio. The amount of the allowance is based on management’s evaluation of the collectability of the loan portfolio, including the nature of the portfolio, credit concentrations, trends in historical loss experience, specific impaired loans, economic conditions, and other risks inherent in the portfolio. A loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Allowances for impaired loans are generally determined based on collateral values or the present value of estimated cash flows. Although management uses available information to recognize losses on loans, because of uncertainties associated with local economic conditions, collateral values, and future cash flows on impaired loans, it is reasonably possible that a material change could occur in the allowance for loan losses in the near term. However, the amount of the change that is reasonably possible cannot be estimated. The allowance is increased by a provision for loan losses, which is charged to expense and reduced by charge-offs, net of recoveries. Changes in the allowance relating to impaired loans are charged or credited to the provision for loan losses. Past due status is determined based on contractual terms. 9  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 Bank Premises and Equipment THE FREEDOM BANK OF VIRGINIA Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Leasehold improvements are amortized over the shorter of the asset life or lease term using the straight-line method. Furniture and equipment are depreciated over estimated useful lives of three to seven years using the straight-line method. The Bank depreciates premises and equipment using accelerated methods for income tax reporting. Expenditures for maintenance, repairs and improvements that do not materially extend the useful lives of bank premises and equipment are charged to earnings. When bank premises or equipment is sold or otherwise disposed of, the cost and related accumulated depreciation or amortization are removed from the accounts, and the effect is reflected in current earnings. Leases that meet certain specified criteria are accounted for as capital assets and liabilities, and those not meeting the criteria are accounted for as operating leases. Other Real Estate Owned Real estate properties acquired through or in lieu of loan foreclosures are initially recorded at the fair value less estimated selling cost at the date of foreclosure. Any write-downs based on the asset's fair value at the date of acquisition are charged to the allowance for loan losses. After foreclosure, valuations are periodically performed by management and property held for sale is carried at the lower of the new cost basis or fair value less cost to sell. Impairment losses on property to be held and used are measured as the amount by which the carrying amount of a property exceeds its fair value. Costs of significant property improvements are capitalized, whereas costs relating to holding property are expensed. The portion of interest costs relating to development of real estate is capitalized. Valuations are periodically performed by management, and any subsequent write- downs are recorded as a charge to operations, if necessary, to reduce the carrying value of a property to the lower of its cost or fair value less cost to sell. Other Assets Included in other assets is approximately $1,207,000 of prepaid expense related to the required prepayment of the FDIC premium through the fourth quarter of 2012. Stockholders’ Equity At December 31, 2009, warrants were outstanding and exercisable to purchase 232,089 shares of common stock at $13.25 per share if exercised by January 15, 2015 and 44,899 shares of common stock at $13.25 per share if exercised by February 16, 2015. Comprehensive income (loss) represents all changes in equity that result from recognized transactions and other economic events of the period. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in comprehensive income but excluded from net income, such as unrealized gains and losses on certain investments in debt and equity securities 10  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 Income Taxes THE FREEDOM BANK OF VIRGINIA Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes currently due plus deferred taxes related primarily to differences between the basis of the net operating losses carry forward and allowance for loan losses. The deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. At December 31, 2009 and 2008, a valuation allowance for the full amount of the gross deferred tax asset was recorded because of the uncertainties of the amount of taxable income that will be generated in future years. The Bank has adopted the new accounting policy for uncertainty in income taxes on January 1, 2009. The adoption of that guidance resulted in no change to the financial statements. As a result of this new guidance, no interest and penalties have been recorded in the accompanying financial statements related to uncertain tax positions. The Bank files an income tax return in the U.S. Federal jurisdiction. The Bank pays state franchise tax in lieu of state income taxes. Currently, the 2008, 2007 and 2006 income tax returns are open and subject to examination. The Bank is not currently under audit by any income tax jurisdictions. As of December 31, 2009, the Bank had no uncertain tax positions that qualify for either recognition or disclosure in the financial statements. Earnings per Share (EPS) Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Bank. The Bank does not have any contracts or options with a dilutive effect; therefore, basic EPS and diluted EPS are equal. Stock-Based Compensation The Bank recognizes the cost of employee services received in exchange for an award of equity instruments in the financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). The Bank also measures the cost of employee services received in exchange for an award based on the grant-date fair value of the award. Employment Contracts In January 2007, the Bank entered into an employment agreement with the Bank’s President. The agreement provides for a base salary, a performance bonus, annual adjustments to compensation and other benefits. The agreement has an initial term of three years and shall be automatically renewed for successive 12 month terms until employment is terminated under specific conditions as provided in the agreement. The Bank has also entered into employment agreements with certain other key employees. The agreements provide for base salary, performance bonuses, and other benefits. The terms of the agreements range from one to two years with options to extend for additional one year periods until employment is terminated under specific conditions as provided in the agreements. 11 THE FREEDOM BANK OF VIRGINIA NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 Statements of Cash Flows The Bank considers all cash and amounts due from depository institutions, excluding interest- bearing deposits in other banks and Federal funds sold, to be cash equivalents for purposes of the statements of cash flows. The Freedom Bank of Virginia periodically has bank deposits including short-term investments in excess of Federally insured limits. Off-Balance Sheet Credit Related Financial Instruments In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. Subsequent Events The date to which events occurring after December 31, 2009, the date of the most recent balance sheet, have been evaluated for possible adjustment to the financial statements or disclosure is March 4, 2010, which is the date on which the financial statements were issued. 2. RESTRICTION OF CASH AND DUE FROM BANKS The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve Bank. The required reserve at December 31, 2009 and 2008 was $606,000 and $464,000, respectively. 3. SECURITIES AVAILABLE-FOR-SALE AND HELD-TO-MATURITY The amortized cost and fair values of securities as shown in the balance sheets of the Bank are as follows: Amortized Costs Gross Unrealized Gains Gross Unrealized Losses Fair Value December 31, 2009 Available-for-sale U.S. Government and Agency securities Corporate securities Mortgage backed securities Total Available-for-sale Held-to-maturity Mortgage backed securities $ 1,000,000 1,587,528 1,976,176 4,563,704 $ 62,870 56,006 - 118,876 $ - - (50,978) (50,978) $ 1,062,870 1,643,534 1,925,198 4,631,602 4,032,860 96,122 - 4,128,982 Total Investment Securities $ 8,596,564 $ 214,998 $ (50,978) $ 8,760,584 December 31, 2008 Available-for-sale U.S. Government and Agency securities Held-to-maturity Mortgage backed securities $ 2,500,000 $ 92,145 $ - $ 2,592,145 7,118,270 79,480 (3,862) 7,193,888 Total Investment Securities $ 9,618,270 $ 171,625 $ (3,862) $ 9,786,033 12  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA The amortized cost and estimated fair value of debt securities at December 31, 2009, by contractual maturity, are as follows: Amounts maturing in: 1 year or less After 1 year - 5 years After 5 years - 10 years After 10 years Mortgage backed securities Available-for-sale Held-to-maturity Amortized Cost Fair Value Amortized Cost Fair Value $ 723,197 1,864,331 - - 2,587,528 1,976,176 $ 4,563,704 $ 741,369 1,965,035 - - 2,706,404 1,925,198 $ 4,631,602 $ - $ - - - - - 4,128,982 $ 4,128,982 - - - - 4,032,860 $ 4,032,860 Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2009 and 2008, U.S. Government obligations with a carrying value of $4,626,677 and $500,000, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Information pertaining to securities with gross unrealized losses at December 31, 2009, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows: 3 Available-for-sale U.S. Government and Agency securities Corporate securities Held-to-maturity Mortgage backed securities Less Than Twelve Months Gross Unrealized Fair Losses Value Over Twelve Months Gross Unrealized Losses Fair Value $ 55,164 $ 934,492 $ - $ - $ - $ - $ - $ - $ - $ - $ - $ - Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and, more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. 13  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA At December 31, 2009, the one debt security with an unrealized loss depreciated six percent from the Bank amortized cost basis. The security is either guaranteed by the U.S. Government or secured by mortgage loans. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the Federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, management feels that the unrealized losses on the security is not deemed to be other-than-temporary. 4. LOANS RECEIVABLE Loans receivable include the following: Commercial Consumer and other Loans held for sale Real estate Subtotal Deferred loan fees Totals 2009 $ 36,190,011 2,948,806 390,300 96,152,302 135,681,419 (281,333) $ 135,400,086 2008 $ 29,802,719 3,579,584 487,264 87,923,971 121,793,538 (332,053) $ 121,461,485 An analysis of the allowance for possible loan losses is as follows: Balance, beginning of period Provision for loan losses Loans charged to reserve Recoveries credited to reserve Totals 2009 $ 2,276,824 4,435,744 (4,969,969) 165,254 $ 1,907,853 2008 $ 681,789 1,865,000 (272,102) 2,137 $ 2,276,824 At December 31, 2009, the total recorded investment in loans on nonaccrual amounted to approximately $4,271,000. There were no loans past due 90 days or more and still accruing interest. At December 31, 2008, the total recorded investment in loans on nonaccrual amounted to approximately $848,000 and the total recorded investment in loans past due 90 days or more and still accruing interest amounted to approximately $650,000. At December 31, 2009 and 2008, the total recorded investment in impaired loans, all of which had allowances determined in accordance with GAAP, amounted to approximately $4,314,000 and $5,202,000, respectively. The average recorded investment in impaired loans amounted to approximately $4,758,000 and $2,901,000 for the years ended December 31, 2009 and 2008, respectively. The allowance for loan losses related to impaired loans amounted to approximately $278,000 and $1,238,000 at December 31, 2009 and 2008, respectively. Interest income on impaired loans of approximately $95,000 was recognized for cash payments received in 2009. 14  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA The Bank has entered into transactions with certain directors, executive officers, significant stockholders, and their affiliates. Such transactions were made in the ordinary course of business on substantially the same terms and conditions, including interest rates and collateral, as those prevailing at the same time for comparable transactions with other customers, and did not, in the opinion of management, involve more than normal credit risk or present other unfavorable features. The aggregate amount of loans outstanding to such related parties was $5,181,156 and $3,503,881 at December 31, 2009 and 2008, respectively. New loans made to such related parties including loans held by new directors, amounted to $3,204,473 and $1,292,089 and payments amounted to $1,527,198 and $822,345 at December 31, 2009 and 2008, respectively. 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment include the following: Furniture and equipment Leasehold improvements Software Total Cost Less accumulated depreciation Net Bank Premises and Equipment 2009 $ 1,064,625 130,959 300,562 1,496,146 (1,066,318) $ 429,828 2008 $ 1,041,675 130,959 262,385 1,435,019 (899,371) $ 535,648 Depreciation of bank premises and equipment charged to expense amounted to $166,947 and $183,080 in 2009 and 2008, respectively. 6. DEPOSITS Time deposits in denominations of $100,000 or more totaled $59,202,651 and $33,232,793 at December 31, 2009 and 2008, respectively. At December 31, 2009, the following are time deposits maturing in years ending December 31: 2010 2011 2012 2013 2014 and thereafter $ 63,346,503 22,417,550 5,285,064 1,088,684 578,683 $ 92,716,484 The Bank held related party deposits of approximately $4,602,158 and $3,976,041 at December 31, 2009 and 2008, respectively. 7. BORROWINGS At December 31, 2009, the Bank had $2,100,000 available under a line of credit Fed Funds facility to be used for temporary, short-term needs with borrowing not to exceed seven consecutive business days. There were no borrowings on this line at December 31, 2009 and 2008. At December 31, 2009, the Bank had an additional $4,000,000 available under a line of credit Fed Funds facility to be used for temporary, short-term needs with borrowings not to exceed 30 consecutive calendar days. There were no borrowings on this line at December 31, 2009. 15  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 8. INCOME TAXES THE FREEDOM BANK OF VIRGINIA The provision for income taxes consists of the following at December 31: Current benefit Deferred benefit 2009 $ - - $ - 2008 $ - - $ - Net deferred tax assets are comprised of the following at December 31: Deferred Source Net operating loss carryforward Loan loss reserve Other Unearned loan fees Depreciation Gross deferred tax assets Allowance Net deferred tax asset 2009 $ 1,784,000 1,104,000 12,000 96,000 (26,000) 2,970,000 (2,970,000) $ - 2008 $ 930,000 728,000 26,000 113,000 (28,000) 1,769,000 (1,769,000) $ - The Bank has net operating losses carried forward of approximately $5,247,000 at December 31, 2009, which start to expire in 2021. 9. CAPITAL REQUIREMENTS The Bank is subject to various regulatory capital requirements administered by the Federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of: total risk-based capital and Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to adjusted total assets (as defined). Management believes, as of December 31, 2009, that the Bank meets all the capital adequacy requirements to which it is subject. As of December 31, 2009, the Bank was categorized as well capitalized under the regulatory framework for prompt corrective action. To remain categorized as well capitalized, the Bank will have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed in the table below. There are no conditions or events since the most recent notification that management believes have changed the Bank’s prompt corrective action category. 16  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA The Bank’s actual capital amounts and ratios as of December 31, 2009 and 2008 are as follows: Actual Amount Ratio For Capital Adequacy Purposes Ratio Amount Minimum to be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio December 31, 2009: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) $ 19,059,025 13.70% $ 11,129,360 8.00% $ 13,911,700 10.00% $ 19,014,892 13.67% $ 5,564,680 4.00% $ 8,347,020 6.00% Tier 1 Capital (to Average Assets) $ 19,014,892 12.67% $ 6,002,702 4.00% $ 7,503,377 5.00% December 31, 2008: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) $ 22,705,324 17.96% $ 10,112,000 8.00% $ 12,640,000 10.00% $ 22,645,429 17.92% $ 5,056,000 4.00% $ 7,584,000 6.00% Tier 1 Capital (to Average Assets) $ 22,645,429 17.38% $ 5,212,973 4.00% $ 6,516,216 5.00% 10. STOCK OPTION PLAN In 2007, the Bank established the 2007 stock option and equity plan (the Plan) for executives, other employees, officers, directors, and consultants. Shares under the Plan may be granted at not less than 100 percent of the fair market value at the grant date. The authorized and granted options under the Plan is as follows: 2007 Plan Authorized 250,000 Granted 99,400 The stock options shall not be exercisable more than ten years after the date such option is granted. The 2007 shares are vested as of December 31, 2009. 17  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 The following summarizes the option activity under the Stock Option Plan: THE FREEDOM BANK OF VIRGINIA Outstanding, December 31, 2007 Grants Exercised Canceled or expired Outstanding, December 31, 2008 Grants Exercised Canceled or expired Outstanding, December 31, 2009 Number of Shares 79,878 19,522 - - 99,400 - - - 99,400 Option Price Per Share $ 14.65 14.65 - - 14.65 - - - $ 14.65 Weighted Average Exercise Price $ 14.65 14.65 - - - - - - $ 14.65 The weighted average fair value of options granted during the year ended December 31, 2008 was $1.71. The weighted average remaining contractual life of options outstanding as of December 31, 2009 is 7.5 years. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Bank uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of our stock and a number of financial assumptions and variables. These variables include the risk free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. The following assumptions were used: a risk free interest rate of 4.5 percent, an estimated dividend yield of zero percent, an expected holding period of five years and volatility of 10 percent. The expected volatility is based on the historical volatility of peer institutions. The risk-free interest rate is the implied yield available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term of the options granted. The expected life is based on the average of the contracted life and vesting schedule for the options granted. The dividend yield assumption is based on expected dividend payouts. Beginning in January 2010, directors will be compensated for attendance at board and committee meetings using Bank common stock. Stock will only be awarded in quarters in which the Bank is profitable, and stock will be issued annually. For the year ended December 31, 2008, the Bank recognized stock-based compensation expense of $21,991. No compensation expense was recognized for the year ended December 31, 2009. 11. OPERATING LEASES In May 2008, the Bank entered into a lease for its loan operations to move from the fifth floor to the second floor at 10555 Main Street, in Fairfax, Virginia. The agreement provides for an initial lease term of approximately three years commencing July 1, 2008 and ending July 31, 2011. Total base annual lease payments are $162,608 for the first year, increasing three percent per annum, thereafter. The lease agreement is for 6,072 square feet. The lease provides the right to renew for two periods of three additional years with the base rent at the current market rate. The agreement includes additional rent payments based on a pro rata portion of annual taxes, common area maintenance charges, and utilities. 18  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA In December 2005, the Bank exercised its five-year option for the branch facility located at 502 Maple Avenue in Vienna, Virginia. The agreement provides for a term of five years ending December 2010. The total base annual lease payments for the first year of the extension are $62,668, increasing a maximum of four percent per annum, thereafter. The lease agreement includes approximately 1,862 square feet on the ground floor for the branch facility. The lease agreement includes additional rent payments based on a pro rata portion of annual taxes and common area maintenance charges. In October 2004, the Bank entered into a lease for its headquarters and an additional branch facility at 10555 Main Street in Fairfax, Virginia. The agreement provides for an initial lease term of ten years commencing January 1, 2005 and ending December 31, 2014. Total base annual lease payments are $168,056 for the first year, increasing a maximum of three percent per annum, thereafter. The lease agreement is for 6,002 square feet. The agreement includes additional rent payments based on a pro rata portion of annual taxes, common area maintenance charges, and utilities. The following are the future minimum lease payments at December 31, 2009: Years ending December 31: 2010 2011 2012 2013 2014 $ 434,874 295,868 214,568 221,005 227,635 $ 1,393,950 Rent expense amounted to $440,149 and $388,716 for the years ended December 31, 2009 and 2008, respectively. 12. FAIR VALUE MEASUREMENTS The Bank adopted the Fair Value Measurements required by the Fair Value Measurements and Disclosures of the FASB Accounting Standards Codification. The "Fair Value Measurements" standard defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The standard defines fair value as the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date and in the principal or most advantageous market for that asset or liability. The fair value should be calculated based on assumptions that market participants would use in pricing the asset or liability, not on assumptions specific to the entity. In addition, the fair value of liabilities should include consideration of non-performance risk including our own credit risk. In addition to defining fair value, the standard expands the disclosure requirements around fair value and establishes a fair value hierarchy for valuation inputs. The hierarchy prioritizes the inputs into three levels based on the extent to which inputs used in measuring fair value are observable in the market. Each fair value measurement is reported in one of the three levels which is determined by the lowest level input that is significant to the fair value measurement in its entirety. These levels are: Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets. 19  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 3 – inputs are generally unobservable and typically reflect management’s estimates of assumptions that market participants would use in pricing the asset or liability. Therefore, the fair values are determined using model-based techniques that include option pricing models, discounted cash flow models, and similar techniques. The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements. Securities available-for-sale: Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily from or corroborated by observable market data. Third party vendors compile prices from various sources and may determine the fair value of identical or similar securities by using pricing models that considers observable market data (Level 2). The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31, 2009: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ 4,631,602 $ 1,643,534 $ 2,988,068 $ - $ 2,592,145 $ - $ 2,592,145 $ - December 31, 2009 Available-for-sale securities December 31, 2008 Available-for-sale securities Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value of these assets usually result from the application of lower-of- cost-or-market accounting or write-downs of individual assets. 20  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA The following describes the valuation techniques used by the Bank to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements. Impaired loans: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction or if an appraisal of the real estate property is over two years old, then the fair value is considered (Level 3). The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivables collateral are based on financial statement balances or aging reports (Level 3). Impaired loans allocated to the allowance for loan losses are measured at fair value on a nonrecurring basis. Any fair value adjustments are recorded in the period incurred as provision for loan losses on the statements of operations. The following table summarizes the Bank’s financial assets that were measured at fair value on a nonrecurring basis as of December 31: Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value $ 4,314,000 $ - $ 4,036,000 $ 278,000 $ 5,202,000 $ - $ 3,964,000 $ 1,238,000 December 31, 2009 Impaired loans December 31, 2008 Impaired loans Foreclosed assets $ 705,000 $ - $ 705,000 $ - The following methods and assumptions were used by the Bank in estimating fair values of financial instruments as disclosed herein: Cash and cash equivalent: The carrying amounts of cash and cash equivalents approximate their fair value. Securities available-for-sale: Fair values for securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments. 21  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 THE FREEDOM BANK OF VIRGINIA Interest bearing deposits at other financial institutions: The carrying amounts of interest bearing deposits at other financial institutions payable on demand, consisting of money market deposits, approximate fair value. Fair value of fixed rate certificates of deposit is estimated based on discounted cash flow analyses using the remaining maturity of the underlying accounts and interest rates currently offered on certificates of deposit with similar original maturities. Restricted stock: The carrying amount of Federal Reserve Bank stock and Federal Home Loan Bank stock approximates fair value. Loans receivable: For variable-rate loans that reprice frequently and have no significant change in credit risk, fair values are based on carrying values. Fair values for certain mortgage loans (for example, one to four family residential), credit-card loans and other consumer loans are based on quoted market prices of similar loans sold in conjunction with securitization transactions, adjusted for differences in loan characteristics. Fair values for business real estate and business loans are estimated using a discounted cash flow analyses, using interest rates currently being offered for loans with similar term to borrowers of similar credit quality. Fair values for impaired loans are estimated using discounted cash flows analyses or underlying collateral values, where applicable. Accrued interest: The carrying amounts of accrued interest approximate fair value. Deposits: The carrying amounts of deposit liabilities payable on demand, consisting of NOW accounts, money market deposits and saving deposits approximate fair value. Fair value of fixed-rate certificates of deposit is estimated based on discounted cash flow analyses using the remaining maturity of the underlying accounts and interest rates currently offered on certificates of deposit with similar original maturities. Off balance sheet financial instruments: At December 31, 2009 and 2008, the fair values of loan commitments and standby letters of credit are immaterial. Therefore, they have not been included in the following table. The estimated fair values of the Bank’s financial instruments are as follows at December 31: Financial assets: Cash and cash equivalents Securities available-for-sale Restricted stock Loans receivable, net Accrued interest receivable Total financial assets Financial liabilities: Interest, money market and savings Time Deposits Accrued interest payable Total financial liabilities 2009 Carrying Amount Fair Value 2008 Carrying Amount Fair Value $ 12,199,127 4,631,602 556,400 133,492,233 483,510 $ 151,362,872 $ 12,199,127 4,631,602 556,400 139,303,835 483,510 $ 157,174,474 $ 12,671,600 2,592,145 712,800 119,184,661 418,545 $ 135,579,751 $ 12,671,600 2,592,145 712,800 122,162,379 418,545 $ 138,557,469 $ 16,918,734 92,716,485 91,096 $ 109,726,315 $ 16,918,734 90,816,961 91,096 $ 107,826,791 $ 14,681,016 86,561,450 203,169 $ 101,445,635 $ 14,681,016 87,378,155 203,169 $ 102,262,340 22  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK THE FREEDOM BANK OF VIRGINIA In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commitments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheet. Financial instruments whose contract amount represents credit risk were as follows: Commitments to extend credit Standby letters of credit 2009 $ 30,513,443 $ 148,202 2008 $ 38,161,150 $ 391,184 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case- by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred any losses on its commitments in either 2009 or 2008. 14. RESTRICTION ON DIVIDENDS The Bank is subject to certain restrictions on the amount of dividends that it may pay without prior regulatory approval. At December 31, 2009 and 2008, capital was not available for payment of dividends. 15. PROFIT SHARING PLAN Effective July 1, 2002, the Bank adopted a contributory 401(k) savings plan covering substantially all employees. The plan allows eligible employees to contribute up to 25 percent of their compensation to the plan. The Board of Directors may elect to approve to match a portion of each employee’s contribution. No contributions were made by the Bank for the years ended December 31, 2009 and 2008. 23  NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2009 AND 2008 16. LEGAL CONTINGENCIES THE FREEDOM BANK OF VIRGINIA In 2007, the Bank made a loan to a borrower and sold a participation in the loan to Monarch Bank. The loan matured on March 1, 2009, and has not been repaid. The participation agreement provides that the Bank will exercise normal mortgage lending practices in administering the loan. There is a disagreement between the two banks on how best to collect and service the loan. Monarch Bank filed an action against the Bank on June 3, 2009 in the Circuit Court of the City of Chesapeake, VA, alleging that the Bank has failed to properly service and collect the loan. Monarch Bank is seeking $2.19 million in actual damages, plus $350,000 in punitive damages as well as attorney’s fees and costs. The Bank intends to defend this action and cannot, at this time, reasonably predict the ultimate outcome of the proceedings, if any, that will be imposed. The trial is currently scheduled for May 2010. Various legal claims can arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Bank’s financial statements. 24 THE FREEDOM BANK OF VIRGINIA BOARD OF DIRECTORS AND SENIOR MANAGEMENT BOARD OF DIRECTORS Richard C. Litman Chairman of the Board William G. Dukas Vice Chairman Cynthia Carter Atwater Corporate Secretary John T. Rohrback President & CEO G. Thomas Collins, Jr. Dr. Terry L. Collins H. Jason Gold Norman P. Horn Dr. David C. Karlgaard Michael A. Miranda Dr. Alvin E. Nashman IN MEMORIAM Russell E. Sherman Director 2007-2009 SENIOR MANAGEMENT John T. Rohrback President & CEO Karin M. Johns Executive Vice President & Chief Financial Officer Craig S. Underhill Executive Vice President & Chief Lending Officer Deborah A. Free Senior Vice President & Branch Administration Officer Christine A. Gorman Senior Vice President & Assistant Corporate Secretary Kimberly J. Ryman Senior Vice President & Senior Administration & Information Officer 25 DIRECTORS EMERITUS, ADVISORY BOARD & GOVERNEMENT CONTRACTING COUNCIL THE FREEDOM BANK OF VIRGINIA WITH DEEPEST APPRECIATION FOR THE DIRECTORS WHO PREVIOUSLY SERVED James N. Newsome Founding Chairman & CEO 2000 - 2003 Director Emeritus John F. Carman Founding Director / Vice Chairman 2000 - 2006 In Memoriam Richard L. Hall Founding Director / President & COO 2000 - 2003 In Memoriam Irving Bernstein Founding Director 2000 - 2007 Director Emeritus Darren Bernstein Irving Bernstein William C. Bogart Louis M. Cocks, Jr. Jimmy B. Contristan John R. Herbert Timothy P. Hecht Michael J. Kurka David C. Knapp George C. Dukas Director 2002 - 2005 Director Emeritus Michael A. Falke Founding Director 2000 - 2002 Timothy P. Hecht Director 2005 - 2007 Director Emeritus George Z. Kontzias Director 2002 - 2006 Director Emeritus ADVISORY BOARD Arlene Lyles Pripeton, Chairman Michael A. Magnotti Donald J. Mayer Owen Michael McCall Stephen W. McCarthy Usama H. Misleh Ali R. Oskuie Thomas J. Riley Harry N. Snyder, O.D. Harry N. Snyder, O.D. Founding Director 2000 - 2007 Director Emeritus James F. Steffey Founding Director 2000 - 2007 Director Emeritus C. Stephen Templeton Founding Director 2000 - 2002 Director Emeritus Charles M. Wright Founding Director 2000 - 2002 Director Emeritus James F. Steffey Michael J. Sullivan C. Stephen Templeton Thomas J. Tracy Stephen M. Turner Robert G. Williams Charles M. Wright Theodore A. Yiannarakis 26 OFFICERS & STAFF THE FREEDOM BANK OF VIRGINIA COMMERCIAL LENDING Craig S. Underhill EVP & Chief Lending Officer cunderhill@freedombankva.com Jeremiah D. Behan SVP & Real Estate Lending Officer jbehan@freedombankva.com Henry L. Finch SVP & Relationship Management Officer hfinch@freedombankva.com Gregory L. Montgomery SVP & Government Contracting Officer gmontgomery@freedombankva.com Michael J. Underwood SVP & Relationship Management Officer munderwood@freedombankva.com Paula A. Newsome VP & Relationship Management Officer pnewsome@freedombankva.com Sally T. Siveroni VP & Portfolio Management Officer ssiveroni@freedombankva.com LOAN ADMINISTRATION Kimberly J. Ryman SVP & Senior Administration & Information Officer kdawson@freedombankva.com Kevin P. Mullins AVP & Loan Administration Officer kmullins@freedombankva.com Alicia G. Bez Loan Clerk abez@freedombankva.com Connie L. Maness Loan Document Specialist cmaness@freedombankva.com Allison Leigh Carey Mortgage Loan Processor lcarey@freedombankva.com MORTGAGE LOAN George J. Decker VP & Mortgage Loan Originator gdecker@freedombankva.com Fredric V. Wilson Mortgage Loan Originator fwilson@freedombankva.com OPERATIONS William T. Rogers Mortgage Loan Originator brogers@freedombankva.com Jeri L. Leddon AVP & Operations Officer jleddon@freedombankva.com Karin M. Johns EVP & Chief Financial Officer kjohns@freedombankva.com Thyda Price VP & BSA Risk Management Officer tprice@freedombankva.com 27 OFFICERS & STAFF THE FREEDOM BANK OF VIRGINIA BRANCHES Deborah A. Free SVP & Branch Administration Officer dafree@freedombankva.com Veronika Cavero Assistant Branch Manager - Fairfax vcavero@freedombankva.com Trilce Castillo Branch Administrative Assistant - Fairfax t1fairfax@freedombankva.com Elizabeth Brown Drive-Thru Teller - Fairfax t2fairfax@freedombankva.com Fares Hakim Branch Officer - Vienna fhakim@freedombankva.com Hilda Alvarez Branch Administrative Assistant - Vienna halvarez@freedombankva.com Jamesenna Lundy Teller - Vienna t1vienna@freedombankva.com Harsha Patel Teller - Vienna t3vienna@freedombankva.com HUMAN RESOURCES, MARKETING AND INVESTOR RELATIONS OFFICER Christine A. Gorman SVP & Assistant Corporate Secretary cgorman@freedombankva.com Ashley Reese Administrative Assistant - Fairfax areese@freedombankva.com 28 COMMERCIAL ACCOUNT SERVICES THE FREEDOM BANK OF VIRGINIA TRANSACTION ACCOUNTS Business Checking Not-For-Profit Organization Checking Business / Corporate Analysis Account Business Interest Checking SAVINGS ACCOUNTS, INVESTMENT & FIDUCIARY SERVICES Business Money Market Business Savings Certificates of Deposit CDAR’S (Certificate of Deposit Account Registry Service) Trustee Accounts CASH MANAGEMENT SERVICES Concentration Accounts Lockbox Accounts Merchant Accounts Repurchase Agreement Accounts Sweep Accounts Sweep Account into a Collateralized Repurchase Agreement Accounts Target Balance Accounts Zero Balance Accounts Wire Transfers CREDIT SERVICES Commercial Term Loans Commercial Line of Credit Commercial Revolving Line of Credit Commercial Letters of Credit Commercial Real Estate Mortgages Commercial Construction Loans Small Business Administration (SBA) Loans MANAGING ACCOUNTS & FUNDS 24 Hour Depository 24 Hour Telephone Banking ACH Transactions & File Transfers American Express Travelers Cheques/Gift Cards ATM Bank by Mail Cashier’s Checks & Money Orders Corporate Credit Card – MasterCard Corporate Debit Card Electronic Check Processing & Deposit Program E-Statements Federal Tax Deposits Freedom Direct Online Banking Lock Box Service Merchant Credit Card Services Notary Services Safe Deposit Boxes 29 PERSONAL ACCOUNT SERVICES THE FREEDOM BANK OF VIRGINIA TRANSACTION ACCOUNTS Freedom Ba$ic (Free) Checking Freedom Interest Checking SAVINGS ACCOUNTS & INVESTMENT & FIDUCIARY SERVICES Personal Money Market Checking Regular Savings Senior or Student or Minor Savings Certificates of Deposit CDAR’S (Certificate of Deposit Account Registry Service) INDIVIDUAL RETIREMENT ACCOUNTS Traditional Roth Coverdell (formerly Education IRA) Simplified Employee Pensions (SEPS) CREDIT SERVICES Auto Loans Boat & RV loans Personal Loans Overdraft Protection Home Equity Loans & Lines of Credit Mortgages MANAGING ACCOUNTS & FUNDS 24 Hour Depository 24 Hour Telephone Banking ACH Transactions/Direct Deposit ATM American Express Travelers Cheques/Gift Cards Bank by Mail Cashier’s Checks & Money Orders Credit Cards – Visa & MasterCard Debit Check Card E-Statements Identity Theft Protection Notary Services Online Banking with Bill Payment Safe Deposit Boxes U. S. Savings Bonds Wire Transfers 30 THE FREEDOM BANK OF VIRGINIA 502 Maple Avenue West Vienna, Virginia 22180 703-667-4170 10555 Main Street Fairfax, Virginia 22030 703-242-5300 FREEDOM – 24 24 Hour Telephone Banking 1-877-236-1468 FREEDOM ONLINE BANKING www.freedombankva.com STOCK TRANSFRER AGENT Computershare P.O. Box 43078 Providence, Rhode Island 02940-3078 or 250 Royall Street Canton, Massachusetts 02021 (800) 962-4284 www.computershare.com Freedom Bank of Virginia P.O. Box 4510, Fairfax, Virginia 22038-4510 703.242.5300 www.freedombankva.com 

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