C e l e b r a t i n g 1 0 Ye a r s
Annual Report
2010
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
OFFICERS & STAFF
COMMERCIAL ACCOUNT SERVICES
PERSONAL ACCOUNT SERVICES
4
5
6
7
8-25
26
27
28-29
30
31
MANAGEMENT DISCUSSION
We are very pleased to report that Freedom Bank of Virginia posted Net Income of $2,433,514 in 2010. The
audited results include income of $1,821,514, before Income Taxes and a $612,000 tax benefit derived from a
tax loss carry forward. Quarterly Net Income for the 4 quarters in 2010 was $362,253 in the 1st quarter,
$457,498 in the 2nd quarter, $561,600 in the 3rd quarter, and $1,052,163, including the tax benefit, in the 4th
quarter. Freedom Bank has posted profits in each of the preceding seven quarters, after taking a $3,810,744
Provision for Loan Losses in the 1st quarter, 2009.
Interest Income totaled $9,155,929 in 2010, compared to $8,199,336 in 2009. Interest Expense was $2,197,618
in 2010, compared to $2,879,159 in 2009. The combination of these two factors, a $956,593 increase in interest
income and a $681,542 decrease in interest expense combined to increase net interest income by $1,638,135.
The principal driver of higher interest income was increased loans outstanding, but the principal driver of
lower interest expense was a decreased interest rate on deposits.
The Provision for Possible Loan Losses improved significantly with $200,000 recorded for the year ending
December 31, 2010, compared to $4,435,744 for the year ending December 31, 2009. The large Provision taken
in the 1st quarter, 2009 overshadowed the net operating profit for the remainder of the year. The Bank was
profitable each of the remaining quarters of 2009 and each quarter in 2010. The 2009 Provision reflected
deteriorating conditions in the economy and heightened concerns about borrower’s credit worthiness. By
2010, the Bank witnessed lower loan delinquencies and non-performing loans and was able to decrease the
amount of Provision for Possible Loan Losses. The Bank had no foreclosures in 2010.
Other Income in 2010 totaled $548,428, compared to $572,448 in 2009. The Bank did not have any gain on
sale of real estate in 2010, compared to $462,621 in 2009. The Bank did not hold any OREO property in 2010.
Total Operating Expense was $5,485,225 as of December 31, 2010, compared to $5,550,037 as of December 31,
2009. A decrease in legal and professional fees by 85% from 2009 to 2010 was the key performance
improvement factor.
For the year ended December 31, 2010, the Bank’s Net Income per Share was $1.03, compared to a Net Loss
per Share of $1.54 for the year ended December 31, 2009.
Financial Condition
Cash, Federal Funds Sold and Investment Securities are primary and secondary sources of liquidity to meet
obligations as they come due and are sources of funds for growth of loans outstanding. As of December 31,
2010, these assets totaled $28,425,469. Liquid assets were 16.6% of Total Assets. On December 31, 2009, the
Bank held $20,863,589 in Cash, Federal Funds and Investment Securities, 13.3% of Total Assets. The Bank
owned $615,600 of Federal Reserve Bank Stock at December 31, 2010, compared to $556,400 at the end of
2009. These assets do not produce as much income as loans; however, liquidity is paramount in a time of
economic uncertainty.
Loans Receivable ended 2010, at $141,067,476, compared to $135,400,086 at the end of 2009. The 4.2%
increase in loans outstanding was underscored by extraordinary repayments of previously originated loans.
In general, many borrowers managed their own liquidity and market risk by reducing debt and as a result, it
was very difficult to grow the loans outstanding.
Other Assets including Premises and Equipment, Accrued Interest, Other Receivables, Other Assets, and
Deferred Tax Asset totaled $2,976,926 as of December 31, 2010, compared to $2,369,485 as of December 31,
2009.
Total Deposits increased to $149,122,963 on December 31 2010, up from $137,431,805 on December 31, 2009.
The $11.7 million deposit increase included $6.7 million in Time Deposits and $5.0 million in Transaction
Account Deposits. During 2010, the Bank achieved the goal of reducing its level of non-core deposits by
replacing them with local, core deposits.
Total Stockholder’s Equity at December 31, 2010 was $21,575,018, compared to $19,059,028 on December 31,
2009, an increase of 13.20%. Book value per share was $9.15 at December 31, 2010. The Bank retained 100%
of its Net Income, including the tax benefit described earlier.
Capital remains strong with all capital ratios remaining above the “Well Capitalized” regulatory definitions.
As of December 31, 2010, Tier 1 Leverage Ratio was 12.35%, more than double the ratio considered by
regulators to be “Well Capitalized”. Tier 1 Risk Based Capital Ratio was 14.85%, more than 8% higher than
the regulatory guidelines and the Tier 2 Risk Based Capital Ratio was 16.05%, well above the 10% regulatory
position.
During 2010, a management succession plan was prepared for the Board to address the growth and attrition
needs of the Bank. The Plan identified successors for key manager positions when internal candidates were
available and positions which would require external recruiting if vacated. It also addressed job
specialization which may require dividing some officer’s responsibilities into separate positions and the
training needs of internal candidates for succession to greater responsibilities. The Plan was activated on
September 1, 2010 when President and CEO John T. Rohrback divided his responsibilities and named Craig
S. Underhill to the responsibility of President.
Since its founding in 2001, Freedom Bank utilized the services of Fidelity Information Services (FIS) as the
Bank’s main data processer. The Bank used a software application called “Premier”. Premier was the core
system for all of our deposit and loan functions. FIS operated the Premier application under a license from
the software owner. In May, 2010, FIS was notified that its license to operate Premier would not be renewed
and it could not offer the software to its clients after the license expiration date. In order to minimize the
impact of this change, the Bank contracted with nationally recognized, Fiserv, to provide the Bank’s data
processing. By moving the Bank’s data processing to Fiserv, we utilized the same core operating system as
used previously and minimized the impact of the change from one data processor to another. This change
entailed a “migration” process from FIS to Fiserv that was carried out with great care and advance planning.
Upon completion of the migration, many of our customers commented that they did not realize the change
had taken place. Our customers have access to their account information at any time, any place. Our
“eBanking” services which include online banking, remote capture, e-statements and bill pay make banking
a breeze and give our customers a greater control over their finances.
The Board of Directors and management are very gratified to report these results to our shareholders.
Richard C. Litman
Chairman of the Board
John T. Rohrback
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, 2010 and 2009, 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, 2010 and 2009, 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 28, 2011
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
The Notes to Financial Statements are an integral part of these statements.
3
BALANCE SHEETS
DECEMBER 31, 2010 AND 2009
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
Deferred Tax Asset
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
2010
2009
$ 3,441,325 $ 1,375,127
10,824,000
17,212,000
4,631,602
5,767,655
2,004,489
615,600
4,032,860
556,400
141,067,476
135,400,086
(1,735,353) (1,907,853)
139,332,123
315,774
133,492,233
429,828
517,293
483,510
612,000
-
1,531,859
1,456,147
$ 171,350,118
$ 157,281,707
$ 29,797,798 $ 27,796,586
19,039,135
16,257,975
830,262
660,759
99,455,768
92,716,485
149,122,963 137,431,805
580,902
699,778
71,235
91,096
149,775,100
138,222,679
Common stock, $5 par value, 5,000,000 shares authorized:
2,357,361 shares issued and outstanding, 2010 & 2009
11,786,805
11,786,805
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings (deficit)
Total Stockholders' Equity
16,042,863
16,002,413
86,159
44,133
(6,340,809)
(8,774,323)
21,575,018 19,059,028
Total Liabilities and Stockholders' Equity
$ 171,350,118
$ 157,281,707
The Notes to Financial Statements are an integral part of these statements.
4
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
2010
2009
Interest Income
Interest and fees on loans
Interest on investment securities
Interest on Federal Funds sold
Total Interest Income
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
$ 8,730,192 $ 7,655,791
379,702 518,444
46,035 25,101
9,155,929
8,199,336
2,197,618 2,879,159
6,958,311 5,320,177
200,000 4,435,744
6,758,311 884,433
548,428 572,448
- 462,621
Total Other Income
548,428
1,035,069
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
2,848,087
3,156,155
503,075
544,326
230,639
234,641
276,562
332,217
701,280
101,590
466,695
525,559
69,271
109,202
202,136
220,144
279,399 234,284
Total Operating Expenses
5,485,225 5,550,037
Income (Loss) before Income Taxes
1,821,514
(3,630,535)
Income Tax (Benefit) Expense
(612,000)
-
Net Income (Loss)
$ 2,433,514 $ (3,630,535)
Net Income (Loss) Per Common Share
$ 1.03 $ (1.54)
Net Income (Loss) Per Diluted Share
$ 1.03 $ (1.54)
The Notes to Financial Statements are an integral part of these statements.
5
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2010 AND 2009
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, 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
Comprehensive Income (Loss):
Net Income
Change in unrealized gain
(loss) on securities
available- for-sale,
net of tax of $22,629
Total Comprehensive Income
Stock based compensation
-
-
-
-
-
-
2,433,514
2,433,514
-
-
42,026
-
42,026
2,475,540
-
40,450
-
-
40,450
Balance, December 31, 2010
2,357,361
$ 11,786,805
$ 16,042,863
$ 86,159
$ (6,340,809)
$ 21,575,018
6
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
2010
2009
Cash Flows from Operating Activities
Net Income (loss)
Noncash items included in net income (loss)
Depreciation and amortization
Provision for possible loan losses
Net amortization of securities
Stock-based compensation expense
Gain on other real estate
Deferred income tax benefit
(Increase) Decrease in
Accrued interest receivable
Other assets
Increase (Decrease) in
Other accrued expenses
Accrued interest payable
Net Cash Provided (Used) by Operating Activities
Cash Flows from Investing Activities
Federal Funds sold, net
Loan originations, net
Purchase of available-for-sale securities
Maturities, calls and paydowns of securities available-for-sale
Paydowns of held-to-maturity securities
Purchase of Federal Reserve Bank Stock
Acquisition of bank equipment
Proceeds from sale of other real estate
Proceeds from redemption of Federal Reserve Bank Stock
$ 2,433,514 $ (3,630,535)
155,620 166,947
200,000 4,435,744
42,347 27,848
40,450 -
- (462,621)
(612,000) -
(33,783) (64,965)
(75,712) (1,194,773)
(141,505) 316,849
(19,861) (112,073)
1,989,070 (517,579)
(6,388,000) 663,000
(6,039,890) (19,826,199)
(2,327,573) (3,935,363)
1,209,575 1,836,526
2,032,624 3,092,694
(59,200) (10,800)
(41,566) (61,127)
- 2,250,833
- 167,200
Net Cash Used by Investing Activities
(11,614,030) (15,823,236)
Cash Flows from Financing Activities
Increase in deposits, net
Net Cash Provided by Financing Activities
11,691,158 16,531,342
11,691,158 16,531,342
Net Increase in Cash and Due from Banks
2,066,198 190,527
Cash and Due from Banks, beginning of year
1,375,127 1,184,600
Cash and Due from Banks, end of year
$ 3,441,325 $ 1,375,127
Noncash Investing Activity
Unrealized gain (loss) on securities available-for-sale, net
$ 42,026 $ (15,761)
Transfer of loans to other real estate owned
$ - $ 1,082,883
Supplemental Information
Cash paid during the year for interest
$ 2,217,479
$ 2,991,232
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, 2010 AND 2009
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 (the Bank) conform to
generally accepted accounting principles (GAAP) and reflect practices of the banking industry. The
policies are summarized below.
Nature of Operations
The Freedom Bank of Virginia 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 (FDIC). 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 stock is considered a restricted investment security, is carried at cost and evaluated
annually for impairment. The stock is required in order to be a member of the Federal Reserve.
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
$993,000 and $390,000 as of December 31, 2010 and 2009, 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
YEARS ENDED DECEMBER 31, 2010 AND 2009
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.
The Bank owned no other real estate at December 31, 2010 and 2009.
Other Assets
Included in other assets is approximately $933,000 and $1,207,000 as of December 31, 2010 and 2009,
respectively, of prepaid expense related to the required prepayment of the FDIC premium through
the fourth quarter of 2012.
Stockholders’ Equity
At December 31, 2010, 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
YEARS ENDED DECEMBER 31, 2010 AND 2009
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 carryforward 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.
Management has determined that recent profitability and projections of future taxable income will
be adequate to absorb a portion of the Bank’s net operating loss carryforward included in the
deferred tax asset. Therefore, $612,000 of the valuation allowance taken against the deferred tax
asset was reversed in December 2010, resulting in the net tax benefit shown in the table in Note 8.
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 2009, 2008 and 2007 income tax returns are open and
subject to examination. The Bank is not currently under audit by any income tax jurisdictions.
The Bank has no uncertain tax positions that qualify for either recognition or disclosure in the financial
statements, and no interest and penalties have been recorded in the accompanying financial statements
related to uncertain tax positions.
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 August 2010, the Bank entered into an employment agreement with the Bank’s current 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 17 months and will 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
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
Statements of Cash Flows
THE FREEDOM BANK OF VIRGINIA
The Bank considers all cash and amounts due from depository
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.
institutions, excluding
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.
Adoption of New Accounting Standards
Accounting Standards Update (ASU) 2009-16, Accounting for Transfers of Financial Assets, provides
guidance to improve the relevance, representational faithfulness, and comparability of the
information that an entity provides in its financial statements about a transfer of financial assets; the
effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s
continuing involvement, if any, in transferred financial assets. ASU 2009-16 was effective for
transfers on or after January 1, 2010.
ASU 2010-06, Fair Value Measurements and Disclosures, Improving Disclosures about Fair Value
Measurements provides amendments that clarify existing disclosures and requires certain new
disclosures. The update is effective for interim and annual reporting periods beginning after
December 15, 2009, except for disclosures about purchases, sales, issuances, and settlements in the
roll forward of activity in Level 3 fair value measurements. Those disclosures are effective for fiscal
years beginning after December 15, 2010 and for interim periods within those fiscal years.
The above recently adopted accounting standards did not have a material impact on the Bank’s
financial statements.
Adoption of New Accounting Standards
ASU 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit
Losses expands disclosures to require an entity to disaggregate by portfolio segment or class certain
existing disclosures and provide certain new disclosures about its financing receivables and related
allowance for credit losses. The disclosures are effective for annual reporting periods ending on or
after December 15, 2011.
The adoption of the new standard is not expected to have a material impact on the Bank’s financial
statements.
12
THE FREEDOM BANK OF VIRGINIA
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
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. The
required reserve at December 31, 2010 and 2009 was $622,000 and $606,000, 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, 2010
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
1,097,819
3,537,284
5,635,103
$ 77,624
46,833
35,466
159,923
$ -
(2,716)
(24,655)
(27,371)
$ 1,077,624
1,141,936
3,548,095
5,767,655
2,004,489
51,915
-
2,056,404
Total Investment Securities $ 7,639,592
$ 211,838
$ (27,371)
$ 7,824,059
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
The amortized cost and estimated fair value of debt securities at December 31, 2010, by contractual
maturity, are as follows:
Available-for-sale
Held-to-maturity
Amortized
Cost
Fair Value
Amortized
Cost
Fair Value
Amounts maturing in:
1 year or less
After 1 year - 5 years
After 5 years - 10 years
After 10 years
Mortgage backed securities
$ - $ - $ - $ -
-
-
-
-
-
-
-
-
2,004,489
2,056,404
$ 2,004,489 $ 2,056,404
1,847,819
-
250,000
2,097,819
3,537,284
$ 5,635,103
1,972,276
-
247,284
2,219,560
3,548,095
$ 5,767,655
13
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
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, 2010 and 2009, U.S. Government obligations with a carrying value of $4,426,044 and
$4,626,677, 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, 2010, aggregated
by investment category and length of time that individual securities have been in a continuous loss
position, follows:
3
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
Available-for-sale
Mortgage backed securities $ 24,655
$ 1,999,125
$ -
$ -
Corporate securities
Held-to-maturity
Mortgage backed securities $ -
$ 2,716
$ 247,284
$ -
$ -
$ -
$ -
$ -
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.
At December 31, 2010, three debt securities with an unrealized loss depreciated one percent from the
Bank amortized cost basis. The securities are secured by mortgage loans or are corporate bonds.
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 securities are not deemed to be
other-than-temporary.
14
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
4. LOANS RECEIVABLE
Loans receivable include the following:
Commercial
Consumer and other
Loans held for sale
Real estate
Subtotal
Deferred loan fees
Totals
THE FREEDOM BANK OF VIRGINIA
2010
$ 32,103,239
2,107,038
992,551
106,177,212
141,380,040
(312,564)
$ 141,067,476
2009
$ 36,190,011
2,948,806
390,300
96,152,302
135,681,419
(281,333)
$ 135,400,086
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
2010
$ 1,907,853
200,000
(682,061)
309,561
$ 1,735,353
2009
$ 2,276,824
4,435,744
(4,969,969)
165,254
$ 1,907,853
At December 31, 2010 and 2009, the total recorded investment in loans on nonaccrual amounted to
approximately $2,299,000 and $4,271,000, respectively. There were no loans past due 90 days or
more and still accruing interest at December 31, 2010. At December 31, 2010 and 2009, the total
recorded investment in impaired loans, all of which had allowances determined in accordance with
GAAP, amounted to approximately $2,299,000 and $4,314,000, respectively. The average recorded
investment in impaired loans amounted to approximately $3,306,000 and $4,758,000 for the years
ended December 31, 2010 and 2009, respectively. There is no specific allowance for impaired loans
at December 31, 2010. The allowance for loan losses related to impaired loans amounted to
approximately $278,000 at December 31, 2009. Interest income on impaired loans of approximately
$2,000 and $95,000 was recognized for cash payments received in 2010 and 2009, respectively. No
additional funds are committed to be advanced in connection with the impaired loans.
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 $3,636,656 and $5,181,156 at
December 31, 2010 and 2009, respectively. New loans made to such related parties including loans
held by new directors, amounted to $1,354,811 and $3,204,473 and payments amounted to $2,899,311
and $1,527,198 at December 31, 2010 and 2009, respectively.
15
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment include the following:
THE FREEDOM BANK OF VIRGINIA
Furniture and equipment
Leasehold improvements
Software
Total Cost
Less accumulated depreciation
Net Bank Premises and Equipment
2010
$ 1,077,548
130,959
300,562
1,509,069
(1,193,295)
$ 315,774
2009
$ 1,064,625
130,959
300,562
1,496,146
(1,066,318)
$ 429,828
Depreciation of bank premises and equipment charged to expense amounted to $155,620 and
$166,947 in 2010 and 2009, respectively.
6. DEPOSITS
Time deposits in denominations of $100,000 or more totaled $61,346,589 and $59,202,651 at
December 31, 2010 and 2009, respectively.
At December 31, 2010, the following are time deposits maturing in years ending December 31:
2011
2012
2013
2014
2015 and thereafter
$ 67,709,760
28,286,768
1,160,979
739,933
1,558,328
$ 99,455,768
The Bank held related party deposits of approximately $4,894,000 and $4,602,000 at December 31,
2010 and 2009, respectively.
7. BORROWINGS
At December 31, 2010, 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, 2010 and 2009.
At December 31, 2010, the Bank had an additional $2,000,000 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, 2010 and 2009
16
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
8. INCOME TAXES
THE FREEDOM BANK OF VIRGINIA
Significant components of deferred income tax assets and liabilities are as follows at December 31:
Deferred Source
Net operating loss carryforward
Loan loss reserve
Other
Unearned loan fees
Depreciation
Gross deferred tax assets
Valuation Allowance
Net deferred tax asset
2010
$ 1,043,000
1,033,000
-
106,000
(22,000)
2,160,000
(1,548,000)
$ 612,000
2009
$ 1,784,000
1,104,000
12,000
96,000
(26,000)
2,970,000
(2,970,000)
$ -
The Bank has net operating losses carried forward of approximately $3,068,000 at December 31, 2010,
which start to expire in 2022.
The provision for income taxes consists of the following at December 31:
Current tax expense
Deferred tax expense
Change in valuation allowance
2010
$ -
810,000
(1,422,000)
$ (612,000)
2009
$ -
-
$ -
The following is a reconciliation of the federal statutory income tax rate to the effective tax rate as a
percent of pre-tax income for the years ended December 31:
Federal statutory rate
Permanent differences
Change in valuation allowance
Effective tax rate
9. CAPITAL REQUIREMENTS
2010
34 %
1
(69)
(34)%
2009
34%
-
-
34%
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).
17
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
Management believes, as of December 31, 2010, that the Bank meets all the capital adequacy
requirements to which it is subject.
As of December 31, 2010, the Bank was categorized as well capitalized under the regulatory
framework for prompt corrective action. To remain categorized as well as capitalized, the Bank will
have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as disclosed
in the following table. There are no conditions or events since the most recent notification that
management believes have changed the Bank’s prompt corrective action category.
The Bank’s actual capital amounts and ratios as of December 31, 2010 and 2009 are as follows:
Actual
For Capital
Adequacy Purposes
Amount
Ratio
Amount
Ratio
Minimum to be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
December 31, 2010:
Total Capital
(to Risk Weighted
Assets)
Tier 1 Capital
(to Risk Weighted
Assets)
$ 21,575,018
14.91% $ 11,575,760 8.00% $ 14,469,700 10.00%
$ 21,488,859
14.85% $ 5,787,880 4.00% $ 8,681,820
6.00%
Tier 1 Capital
(to Average Assets) $ 21,488,859
12.49% $ 6,880,367 4.00% $ 8,600,459
5.00%
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%
18
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
10. STOCK OPTION PLAN
THE FREEDOM BANK OF VIRGINIA
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
149,400
The stock options shall not be exercisable more than ten years after the date such option is granted.
The granted stock option and equity plan shares are vested as of January 1, 2009. Shares vest when
granted subsequent to January 1, 2009.
The following summarizes the option activity under the Stock Option Plan:
Outstanding, December 31, 2008
Grants
Exercised
Canceled or expired
Outstanding, December 31, 2009
Grants
Exercised
Canceled or expired
Outstanding, December 31, 2010
Number of
Shares
99,400
-
-
-
99,400
50,000
-
-
149,400
Option Price
Per Share
$ 14.65
-
-
-
14.65
8.83
-
-
$ 12.70
Weighted
Average
Exercise Price
$ 14.65
-
-
-
-
8.83
-
-
$ 12.70
The weighted average fair value of options granted during the year ended December 31, 2010 was
$1.23. The weighted average remaining contractual life of options outstanding as of December 31,
2010 is 7.8 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 3.25 percent, an estimated dividend
yield of zero percent, an expected holding period of 10 years and volatility of 5.0 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 bonds 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.
19
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
In 2009 the Bank approved a compensation plan for the Board of Directors starting in 2010. The plan
provided for payments to directors for attending regularly scheduled meetings of the Board of
Directors as well as subcommittee meetings during 2010. The plan required payment to be made in
the form of Bank stock to be accrued in 2010 and paid out in the first quarter of 2011.
For the year ended December 31, 2010, the Bank recognized stock-based compensation expense of
$40,450. No compensation expense was recognized for the year ended December 31, 2009.
11. OPERATING LEASES
In December 2010, the Bank exercised its second 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 2015. The total base annual lease payments for the second year of the extension are
$66,774, increasing a maximum of five 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 May 2008, the Bank entered into a lease for its loan operations on 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.
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 10 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, 2010:
Years ending December 31:
2011
2012
2013
2014
Thereafter
$ 362,642
284,681
294,623
304,934
81,164
$ 1,328,044
Rent expense amounted to $448,441 and $440,149 for the years ended December 31, 2010 and 2009,
respectively.
20
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
12. FAIR VALUE MEASUREMENTS
THE FREEDOM BANK OF VIRGINIA
Fair value is the exit price that would be received to sell an asset or paid to transfer a liability. Fair
value is a market-based measurement that should be determined using assumptions that market
participants would use in pricing an asset or liability. A three-level hierarchy is used to prioritize
the inputs used in measuring fair value. The levels within the hierarchy are described with Level 1
having the highest priority and Level 3 having the lowest. These levels are:
Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active
markets.
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, 2010:
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Fair Value
$ 5,767,655 $ 1,141,936
$ 4,625,719
$ -
$ 4,631,602 $ 1,643,534
$ 2,988,068
$ -
December 31, 2010
Available-for-sale securities
December 31, 2009
Available-for-sale securities
21
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
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.
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
December 31, 2010
Impaired loans
December 31, 2009
Impaired loans
22
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
The following methods and assumptions were used by the Bank in estimating fair values of financial
instruments as disclosed herein:
Cash and cash equivalents: 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.
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.
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, 2010 and 2009, the fair values of loan
commitments and standby letters of credit are immaterial. Therefore, they have not been
included in the following table.
23
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
The estimated fair values of the Bank’s financial instruments are as follows at December 31:
2010
2009
Carrying
Amount
Fair Value
Carrying
Amount
Fair Value
Financial assets:
Cash and due from banks
Federal Funds sold
Securities available-for-sale
Securities held-to-maturity
Loans receivable, net
Accrued interest receivable
Total financial assets
$ 3,441,325
17,212,000
5,767,655
2,004,489
139,332,123
517,293
$ 168,274,885
$ 3,441,325
17,212,000
5,767,655
2,056,405
141,351,184
517,293
$ 170,345,862
$ 1,375,127
10,824,000
4,631,602
4,032,860
133,492,233
483,510
$ 154,839,332
$ 1,375,127
10,824,000
4,631,602
4,128,982
139,303,835
483,510
$ 160,747,056
Financial liabilities:
Non-Interest bearing deposits $ 29,797,798
19,869,397
Interest bearing deposits
99,455,768
Time Deposits
71,235
Accrued interest payable
$ 149,194,198
Total financial liabilities
$ 29,797,798
19,869,397
97,642,988
71,235
$ 147,381,418
$ 27,796,586
16,918,734
92,716,485
91,096
$ 137,522,901
$ 27,796,586
16,918,734
90,816,961
91,096
$ 135,623,377
13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
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
2010
$ 42,092,564
$ 416,202
2009
$ 30,513,443
$ 148,202
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.
24
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
THE FREEDOM BANK OF VIRGINIA
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 2010 or 2009.
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, 2010 and 2009, 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.
The Board of Directors may elect to approve to match a portion of each employee’s contribution.
The Bank elected to make a discretionary contribution of $68,904 for the year ended December 31,
2010. No contributions were made by the Bank for the year ended December 31, 2009
16. LEGAL CONTINGENCIES
In 2007, The Freedom Bank of Virginia made a loan to a borrower and sold a participation in the
loan to Monarch Bank. The loan matured on March 1, 2009, and was not repaid. The participation
agreement provided that the Bank would exercise normal mortgage lending practices in
administering the loan. There was 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, Virginia, alleging that the Bank failed to properly service and collect the
loan. Monarch Bank sought $2.19 million in actual damages, plus $350,000 in punitive damages as
well as attorney’s fees and costs. The two parties entered into a Settlement and Mutual Release
Agreement for the case dated May 3, 2010. The Bank agreed to repurchase Monarch Bank’s
remaining portion of the loan and Monarch Bank agreed it was not entitled to any future recoveries
in the loan. Both parties agreed to release one another from any liability related to the loan.
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.
25
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
THE FREEDOM BANK OF VIRGINIA
BOARD OF DIRECTORS
Richard C. Litman
Chairman of the Board
William G. Dukas
Vice Chairman
Cynthia Carter Atwater
Corporate Secretary
John T. Rohrback
Chief Executive Officer
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
SENIOR MANAGEMENT
Craig S. Underhill
President
Deborah A. Free
Senior Vice President
& Branch Administration Officer
John T. Rohrback
Chief Executive Officer
Karin M. Johns
Executive Vice President
& Chief Financial Officer
Robert D. Willey, Jr.
Executive Vice President, Commercial Lending
Kimberly J. Ryman
Senior Vice President
& Senior Administration & Information Officer
Christine A. Gorman
Senior Vice President
& Assistant Corporate Secretary
26
DIRECTORS EMERITUS & ADVISORY BOARD
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
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.
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
Russell E. Sherman
Founding Director
2000 - 2007
In Memoriam
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
27
OFFICERS & STAFF
THE FREEDOM BANK OF VIRGINIA
COMMERCIAL LENDING
Craig S. Underhill
President
cunderhill@freedombankva.com
Jeremiah D. Behan
SVP & Real Estate Lending Officer
jbehan@freedombankva.com
Paula A. Newsome
VP & Relationship Management Officer
pnewsome@freedombankva.com
Robert D. Willey, Jr.
EVP, Commercial Lending
bwilley@freedombankva.com
Michael J. Underwood
SVP & Relationship Management Officer
munderwood@freedombankva.com
Gregory L. Montgomery
SVP & Government Contracting Officer
gmontgomery@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
Allison Leigh Carey
Mortgage Loan Processor
lcarey@freedombankva.com
Alicia G. Bez
Loan Clerk
abez@freedombankva.com
Brenda Croft
Loan Document Specialist
bcroft@freedombankva.com
MORTGAGE LOAN
George J. Decker
VP & Mortgage Loan Originator
gdecker@freedombankva.com
Fredric V. Wilson
Mortgage Loan Originator
fwilson@freedombankva.com
OPERATIONS
Ashley Reese
Portfolio Manager
areese@freedombankva.com
Connie L. Maness
Loan Document Specialist
cmaness@freedombankva.com
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
28
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
Janet Gaffney
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
29
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
Corporate Credit Card – MasterCard
Corporate Debit Card
Electronic Check Processing & Deposit Program
E-Statements
Freedom Direct Online Banking
Lock Box Service
Merchant Credit Card Services
Notary Services
Safe Deposit Boxes
30
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
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
31
2008
Annual Report
Freedom Bank of Virginia
P.O. Box 4510, Fairfax, Virginia 22038-4510
703.242.5300
www.freedombankva.com