Annual Report
2011
To Our Shareholders:
On behalf of the Board of Directors and management team we are very pleased to present the 2011 financial
results of The Freedom Bank of Virginia. It was a year of historical growth for the Bank in many ways. The
Bank ended the year with record pre-tax profits, asset size, loans outstanding and most importantly, a
smooth transition of top management.
John Rohrback retired from Freedom Bank after ten years of service at the end of July 2011, and was
succeeded by Craig Underhill, who was the President and COO of the Bank at that time. We are pleased
to inform you that John agreed to remain on the Board of Directors, where he continues to provide
leadership and guidance to the Bank.
John was a founding employee of Freedom Bank and served as CEO for most of his tenure. He was
instrumental in every major decision for the first ten years, including the large capital raising effort in 2007.
He successfully steered the Bank through the trouble times of the industry these past four years and left a
legacy of strong capital and earnings to allow for future growth. On behalf of the Board of Directors, we
thank John for his strong leadership and are thankful for his continued involvement with the Bank.
Freedom Bank continued the upward earnings trend in 2011, finishing the year with a record pre-tax net
income of $1,900,300, up from $1,821,514 the prior year. The Bank recognized a tax benefit in 2010 that
increased earnings by $612,000. No tax benefit was recognized in 2011.
Total assets grew $36,207,146 or 21.1% to a record $207,557,264 in 2011. Even in a soft economy, the Bank
experienced double digit loan growth of 10.2% to $154,407,193. Because assets were growing faster than
loans, the Bank increased investments in securities by $8,077,806 or 103.9% over the prior year. Again in
2011 the Bank had no Other Real Estate Owned from foreclosures on its books at year end or at any time
during the year.
Freedom Bank generated strong deposit growth in 2011 as well, with more customers choosing to move
money into their Interest Checking Accounts from their Demand Deposit Accounts. Total non interest
bearing Demand Deposits decreased $4,405,495 (14.8%) to $25,392,303 in 2011. This was more than offset
by the $22,634,635 (118.9%) increase in Interest Checking deposits. Overall, these stable transaction account
balances increased $18,929,141 (37.3%) to $66,067,073 in 2011. Total deposits for the Bank increased
$34,023,360 to $183,146,322.
Capital continues to be both a focus and strength of Freedom Bank. Common Equity increased by
$2,122,384 or 9.8% to $23,697,402 during the year. Freedom had 2,363,665 shares outstanding at December
31, 2011 providing a book value per share of $10.03. Regulatory Capital minimums for Tier 1 Leverage
Ratio, Risk Based Capital Tier 1, and Risk Based Capital Tier 2 are 5.0%, 6.0% and 10.0% respectively to be
considered well capitalized. At December 31, 2011 the ratios for the Bank were 12.85%, 14.44% and 14.52%
respectively, all in the well capitalized category. The Bank continues its tradition of maintaining a strong
capital base to serve the needs of its customers and stockholders.
This year Freedom Bank announced a six for five stock split that was effective for stockholders owning the
stock on February 16, 2012.
The Board of Directors and management are pleased to be able to present you with these results and we
thank you for your continued support of the Bank.
Richard C. Litman
Chairman of the Board
Craig S. Underhill
President & Chief Executive Officer
2011 Financial Summary
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITORS’ REPORT
3
FINANCIAL STATEMENTS
Balance Sheets
Statements of Operations
Statements of Changes in Stockholders’ Equity
swolF hsaC fo stnemetatS
stnemetatS laicnaniF ot setoN
BOARD OF DIRECTORS & SENIOR MANAGEMENT
DRAOB YROSIVDA & SUTIREME SROTCERID
FFATS & SRECIFFO
SECIVRES TNUOCCA LAICREMMOC
SECIVRES TNUOCCA LANOSREP
4
5
6
7
-308
31
32
33
43
53
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, 2011 and 2010, 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, 2011 and 2010, 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 2, 2012
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
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
2011
2010
ASSETS
Cash and Due from banks
Interest Bearing Deposit with Banks
Federal Funds sold
Securities Available-for-Sale
Securities Held-to-maturity
Federal Reserve Bank Stock, at cost
Loans Held for Sale
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
Common stock, $5 par value, 5,000,000 shares authorized:
2,363,665 shares issued and outstanding, 2011
2,357,361 shares issued and outstanding, 2010
Additional paid-in capital
Accumulated other comprehensive income
Retained earnings (deficit)
Total Stockholders' Equity
Total Liabilities and Stockholders' Equity
$ 16,128,032
1,007,339 -
$ 3,441,325
15,753,000
15,183,798
17,212,000
5,767,655
666,152
689,350
3,007,500
2,004,489
615,600
992,551
154,407,193
(2,037,164)
140,074,925
(1,735,353)
152,370,029
213,857
138,339,572
315,774
519,450
517,293
612,000
612,000
1,406,757
1,531,859
$ 207,557,264
$ 171,350,118
$ 25,392,303
$ 29,797,798
41,673,770
19,039,135
1,269,065
830,262
114,811,184
99,455,768
183,146,322
149,122,963
654,898
580,902
58,642
71,235
183,859,862
149,775,100
11,818,325
11,786,805
16,184,810
16,042,863
134,776
86,159
(4,440,509)
(6,340,809)
23,697,402
21,575,018
$ 207,557,264
$ 171,350,118
The Notes to Financial Statements are an integral part of these statements.
4
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
2011
2010
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
$ 9,110,312
399,427
38,662
$ 8,730,192
379,702
46,035
9,548,401
9,155,929
1,861,828
2,197,618
7,686,573
6,958,311
348,000
200,000
7,338,573
6,758,311
568,028
548,428
Total Other Income
548,428
548,428
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
3,406,089
530,328
218,752
241,878
398,568
534,008
124,851
202,955
348,872
3,156,155
544,326
234,641
332,217
101,590
525,559
109,202
202,136
279,399
Total Operating Expenses
6,006,301
5,485,225
Income (Loss) before Income Taxes
1,900,300
1,821,514
Income Tax (Benefit) Expense
Net Income (Loss)
-
(612,000)
$ 1,900,300
$ 2,433,514
Net Income (Loss) Per Common Share
$ 0.80
$ 1.03
Net Income (Loss) Per Diluted Share
$ 0.80
$ 1.03
The Notes to Financial Statements are an integral part of these statements.
5
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
Accumulated
Other
Shares
Additional
Comprehensive
of Common
Common
Stock
Stock
Paid-In
Capital
Income
(Deficit)
Retained
Earnings
(Deficit)
Total
Stockholders'
Equity
Balance, December 31, 2009
2,357,361
$ 11,786,805
$ 16,002,413
$ 44,133
$ (8,774,323)
$ 19,059,028
Comprehensive Income:
Net Income
Change in unrealized gain
-
-
-
-
2,433,514
2,433,514
on securities available- for-sale,
net of tax of $22,629
-
-
-
42,026
-
42,026
Total Comprehensive Income
Stock-Based Compensation
-
-
40,450
-
-
40,450
2,475,540
Balance, December 31, 2010
2,357,361
11,786,805
16,042,863
86,159
(6,340,809)
21,575,018
Comprehensive Income:
Net Income
Change in unrealized gain
on securities available- for-sale,
net of tax of $26,179
Total Comprehensive Income
Stock-Based Compensation
-
-
-
-
-
-
-
-
1,900,300
1,900,300
48,617
-
48,617
1,983,642
-
138,742
-
-
138,742
Balance, December 31, 2011
2,363,665
$ 11,818,325
$ 16,184,810
$ 134,776
$ (4,440,509)
$ 23,697,402
The Notes to Financial Statements are an integral part of these statements.
6
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
2011
2010
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
Gain on sale of available-for-sale securities
Stock-based compensation expense
Deferred income tax benefit
(Increase) Decrease in
Loans held for sale
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
Interest bearing deposit with banks
Loan originations, net
Purchase of available-for-sale securities
Maturities, calls and paydowns of securities available-for-sale
Proceeds from sales of securities available-for-sale
Paydowns of held-to-maturity securities
Purchase of Federal Reserve Bank Stock
Acquisition of bank equipment
$ 1,900,300
$ 2,433,514
108,998
348,000
67,420
(72,500)
138,742
-
-
155,620
200,000
42,347
-
40,450
(612,000)
(2,014,949)
(2,157)
125,102
(603,000)
(33,783)
(75,712)
47,817
(12,593)
634,180
(141,505)
(19,861)
1,386,070
1,459,000
(1,007,339)
(14,378,457)
(11,223,645)
814,878
1,072,500
1,338,337
(73,750)
(7,081)
(6,388,000)
-
(5,436,890)
(2,327,573)
1,209,575
-
2,032,624
(59,200)
(41,566)
Net Cash Used by Investing Activities
(22,005,557)
(11,011,030)
Cash Flows from Financing Activities
Increase in deposits, net
Common stock issuance
34,058,359
34,725
11,691,158
-
Net Cash Provided by Financing Activities
34,058,084
11,691,158
Net Increase in Cash and Due from Banks
12,686,707
2,066,198
Cash and Due from Banks, beginning of year
3,441,325
1,375,127
Cash and Due from Banks, end of year
$ 16,128,032
$ 3,441,325
Noncash Investing Activity
Unrealized gain (loss) on securities available-for-sale, net
$ 48,617
$ 42,026
Supplemental Information
Cash paid during the year for interest
$ 1,874,421
$ 2,217,479
Cash paid during the year for income taxes
$ 80,000
$ -
The Notes to Financial Statements are an integral part of these statements.
7
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
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
income.
losses reported
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.
Realized gains (losses) on securities
in other comprehensive
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 is
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, 2011 AND 2010
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 sells its mortgage loans forward to investors and the estimated fair value is largely dependent
upon the terms of these outstanding loan purchase commitments, as well as movement in market
interest rates.
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 ongoing 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, 2011 AND 2010
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, 2011 and 2010.
Other Assets
Included in other assets is approximately $739,000 and $933,000 as of December 31, 2011 and 2010,
respectively, of prepaid expense related to the required prepayment of the FDIC premium through the
fourth quarter of 2012.
Stockholders’ Equity
At December 31, 2011, 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, 2011 AND 2010
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 2010, 2009 and 2008 income tax returns are open and
subject to examination. The Bank is not currently under audit by any income tax jurisdiction.
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, 2011 AND 2010
Statements of Cash Flows
THE FREEDOM BANK OF VIRGINIA
The Bank considers all cash and amounts due from banks, 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.
Financial Statement Reclassification
Certain reclassifications have been made to conform the prior period data to the current
presentation. These reclassifications had no effect on reported earnings.
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) 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 and are included in these financials
retrospectively. Under ASU 2011-01, the disclosures related to troubled debt restructurings within
this update are effective for the first annual reporting period ending on or after December 15, 2011
and are not expected to have a material impact on the Bank’s financial statements.
Accounting Standard Updates Not Yet Effective
ASU 2011-02, A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring,
clarifies which loan modifications constitute troubled debt restructurings. The update is intended to
assist creditors in determining whether a modification of the terms of a receivable meets the criteria
to be considered a troubled debt restructuring, both for purposes of recording an impairment loss
and for disclosure of troubled debt restructurings. The update is effective for annual periods ending
on or after December 15, 2012, including interim periods within those annual periods.
ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and
Disclosure Requirements in U.S. GAAP and IFRSs, changes the wording used to describe many of the
requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value
measurements. The update is effective for annual periods beginning after December 15, 2011.
12
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
ASU 2011-05, Comprehensive Income: Presentation of Comprehensive Income, requires that all nonowner
changes in stockholder’s equity be presented either in a single continuous statement of
comprehensive income or in two separate but consecutive statements. The update eliminates the
option to present the components of other comprehensive income as part of the statement of changes
in stockholder’s equity. ASU 2011-12 delayed the effectiveness of the provisions of this update that
require the presentation on the face of the income statement of the components of net income which
are being reclassified from accumulated other comprehensive income. The remaining provisions of
this standard are effective for fiscal years ending after December 15, 2012, and interim and annual
periods thereafter.
The adoption of the new accounting standard updates are not expected to have a material impact on
the Bank’s financial statements.
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, 2011 and 2010 was $712,000 and $622,000, 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, 2011
Available-for-sale
U.S. Government and
Agency securities
Corporate securities
Mortgage backed securities
Total Available-for-sale
Held-to-maturity
Mortgage backed securities
$
4,000,000
2,036,359
8,940,092
14,976,451
$
32,451
42,719
149,383
224,553
$
-
(7,292)
(9,914)
(17,206)
$
4,032,451
2,071,786
9,079,561
15,183,798
666,152
23,206
-
689,358
Total Investment Securities
$
15,642,603
$
247,759
$
(17,206)
$
15,873,156
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
2,004,489
$
77,624
46,833
35,466
159,923
51,915
$
-
(2,716)
(24,655)
(27,371)
$
1,077,624
1,141,936
3,548,095
5,767,655
-
2,056,404
Total Investment Securities
7,639,592
$
$
211,838
$
(27,371)
$
7,824,059
13
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
The amortized cost and estimated fair value of debt
maturity, are as follows:
securities at December
31, 2011, by contractual
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
$
-
$
-
4,238,654
1,547,705
250,000
6,036,359
8,940,092
4,308,290
1,553,239
242,708
6,104,237
9,079,561
-
$
-
-
-
-
-
$
-
-
-
-
666,152
689,358
$
14,976,451
$
15,183,798
$
666,152
$
689,358
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, 2011 and 2010, U.S. Government and agency securities and mortgage backed
securities with a carrying value of $6,897,234 and $4,426,044, 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, 2011, aggregated
by investment category and length of time that individual securities have been in a continuous loss
position, is as follows:
Less Than Twelve Months
Gross
Unrealized
Losses
Fair
Value
Over Twelve Months
Gross
Unrealized
Losses
Fair
Value
Available-for-sale
Corporate securities
$
-
$
-
$
7,292
$
242,708
Mortgage backed securities
$
9,914
$
2,353,692
$
-
$
-
Held-to-maturity
Mortgage backed securities
$
-
$
-
$
-
$
-
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.
14
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
At December 31, 2011, two debt securities with an unrealized loss for less than one year depreciated less
than one percent from the Bank amortized cost basis. One security with an unrealized loss for
greater than one year depreciated three 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.
4.
LOANS RECEIVABLE
Loans receivable include the following:
Commercial
Consumer and other
Real estate
Subtotal
Deferred loan fees
Totals
$
2011
36,236,920
1,687,104
116,773,498
154,697,522
(290,329)
$
2010
32,103,239
2,107,038
106,177,212
140,387,489
(312,564)
$
154,407,193
$
140,074,925
Commercial and industrial loans: The commercial lending portfolio consists primarily of commercial
and industrial loans for the financing of accounts receivable, property, plant and equipment.
Commercial loans typically are made on the basis of the borrower's ability to repay the loan from the
cash flow from its business and are secured by business assets, such as commercial real estate,
accounts receivable, equipment and inventory, the values of which may fluctuate over time and
generally cannot be appraised with as much precision as residential real estate. To manage these risks,
the Bank's policy is to secure commercial loans originated with both the assets of the business,
which are subject to the risks described above, and other additional collateral and guarantees that may
be available.
Real estate - commercial loans: Commercial real estate loans are primarily secured by various types of
commercial real estate, including office, retail, warehouse, industrial and other non-residential types of
properties and are made to the owners and/or occupiers of such property. The repayment of
loans secured by income-producing properties is typically dependent upon the successful operation
of a business or real estate project, and thus may be subject to adverse conditions in the commercial
real estate market or in the general economy. The Bank generally requires personal guarantees or
endorsements with respect to these loans and loan-to-value ratios for commercial real estate loans,
which generally do not exceed 80 percent.
Real estate - residential and home equity loans: This portfolio consists of residential first and second
mortgage loans, residential construction loans and home equity lines of credit and term loans
secured primarily by the residences of borrowers. Residential mortgage loans and home equity lines
of credit secured by owner-occupied property generally are made with a loan-to-value ratio of up to
80 percent.
15
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
An analysis of the allowance for possible loan losses based on type or loan segment, which identifies
certain loans that are evaluated for individual or collective impairment, as of December 31 is as
follows:
Commercial Real Estate - Real Estate - Real Estate -
and Industrial Commercial Construction Residential
Consumer Unallocated
Total
2011
Allowance for Possible Loan Losses:
Beginning balance
Charge-offs
Recoveries
Provision
$
$
250,804
(30,982)
32,011
22,519
770,680
-
-
405,455
$
$
331,626
(49,000)
1,782
(26,003)
293,370
-
-
6,820
$
$
21,474
-
-
(7,595)
67,399
-
-
(53,196)
$
1,735,353
(79,982)
33,793
348,000
Ending balance
$
274,352
$
1,176,135
$
258,405
$
300,190
$
13,879
$
14,203
$
2,037,164
Individually evaluated for
impairment
Collectively evaluated for
impairment
Loans Receivable:
Ending balance
Individually evaluated for
impairment
Collectively evaluated for
impairment
2010
Allowance for Possible Loan Losses:
$
-
$
314,422
$
-
$
72,073
$
-
$
-
$
386,495
274,352
861,713
258,405
228,117
13,879
14,203
1,650,669
$
36,236,920
$
85,319,241
$
13,708,236
$
17,746,021
$
1,687,104
$
$
506,313
$
3,185,232
$
1,400,125
$
-
$
367,073
$
35,730,607
82,134,009
12,308,111
17,746,021
1,320,031
-
-
-
$
154,697,522
$
5,458,743
149,238,779
Beginning balance
Charge-offs
Recoveries
Provision
$
$
561,686
-
58,815
(369,697)
534,784
-
-
235,896
$
205,380
(471,676)
240,537
357,385
$
391,726
(167,161)
247
68,558
$
$
54,918
(43,224)
9,962
(182)
159,359
-
-
(91,960)
$
1,907,853
(682,061)
309,561
200,000
Ending balance
$
250,804
$
770,680
$
331,626
$
293,370
$
21,474
$
67,399
$
1,735,353
Individually evaluated for
impairment
Collectively evaluated for
impairment
Loans Receivable:
Ending balance
Individually evaluated for
impairment
Collectively evaluated for
impairment
$
-
$
-
$
-
$
-
$
-
$
-
$
-
250,804
770,680
331,626
293,370
21,474
67,399
1,735,353
$
32,103,239
$
75,837,640
$
11,419,747
$
18,919,825
$
2,107,038
$
$
742,746
$
-
$
1,556,000
$
-
$
-
$
31,360,493
75,837,640
9,863,747
18,919,825
2,107,038
-
-
-
$
140,387,489
$
2,298,746
138,088,743
16
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
An analysis of non-accrual and past due loans is as follows at December 31:
30-59 Days
Past Due
60-89 Days
90 Days or
Past Due More Past Due Past Due
Total
Total Financing Nonaccrual
Current
Receivables
Loans
2011
Commercial - non-real estate
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Construction
Residential
Commercial
Consumer - non-real estate
Automobile
Other
Residential
First Trusts
Equity Lines
Total
2010
Commercial - non-real estate
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Construction
Residential
Commercial
Consumer - non-real estate
Automobile
Other
Residential
First Trusts
Equity Lines
Total
$
-
$
-
$
-
$
-
$
36,236,920
$
36,236,920
$
506,313
418,403
-
288,249
-
978,838
-
1,685,490
-
31,196,991
52,436,759
32,882,481
52,436,759
978,838
-
-
-
-
1,428
-
-
-
-
-
-
-
-
-
575,094
-
575,094
8,616,200
4,516,942
8,616,200
5,092,036
1,400,125
575,094
-
-
-
1,428
329,689
1,355,987
329,689
1,357,415
-
367,073
-
367,073
9,330,217
8,048,732
9,330,217
8,415,805
-
-
-
367,073
$
419,831
$
288,249
$
1,921,005
$
2,629,085
$
152,068,437
$
154,697,522
$
3,827,443
$
127,882
$
-
1,625,803
-
575,094
-
-
-
-
$
2,328,779
$
-
-
-
-
-
-
-
-
-
-
$
$
-
-
-
-
-
-
-
-
-
-
$
127,882
$
31,975,357
$
32,103,239
$
742,746
-
1,625,803
35,277,315
38,934,522
35,277,315
40,560,325
-
-
-
575,094
5,460,613
5,384,041
5,460,613
5,959,135
-
-
-
-
228,058
1,878,980
228,058
1,878,980
10,133,274
8,786,550
10,133,274
8,786,550
1,556,000
-
-
-
-
-
$
2,328,779
$
138,058,710
$
140,387,489
$
2,298,746
17
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
An analysis of impaired loans based on loan segment is as follows at December 31:
Recorded
Investment
Unpaid
Average
Related
Principal Allowance for Recorded
Loan Losses
Balance
Investment Recognized
Interest
Income
$
506,313
$
506,313
$
1,400,125
1,400,125
978,838
2,206,394
367,073
506,313
3,185,232
1,400,125
367,073
978,838
2,781,488
367,252
506,313
3,760,326
1,400,125
367,252
-
-
38,750
275,672
72,073
-
314,422
-
72,073
$
514,397
$
1,501,502
982,930
2,203,121
367,252
514,397
3,186,051
1,501,502
367,252
-
-
43,511
90,707
2,380
-
134,218
-
2,380
2011
With no related allowance recorded:
Commercial - non-real estate
Commercial and industrial
Construction
Residential
With an allowance recorded:
Commercial - real estate
Owner occupied
Non-owner occupied
Consumer
Total:
Commercial - non-real estate
Commercial - real estate
Construction
Consumer
2010
With no related allowance recorded:
Commercial - non-real estate
Commercial and industrial
Construction
Residential
Total:
Commercial - non-real estate
Construction
742,746
1,556,000
742,746
1,556,000
$
742,746
$
742,746
$
1,556,000
1,556,000
-
-
-
-
$
784,578
$
1,556,000
784,578
1,556,000
-
-
-
-
No additional funds are committed to be advanced in connection with the impaired loans.
One of the most significant factors in assessing the Bank’s loan portfolio is the risk rating. The Bank
uses the following risk ratings to manage the credit quality of its loan portfolio: pass, special mention,
substandard, doubtful and loss. Special mention loans are those loans that have potential weakness
that deserves management’s close attention. These loans have potential weaknesses that may result
in deterioration of the repayment prospects for the loan or the bank’s credit position at some future
date. Substandard loans are inadequately protected by current sound worth, paying capacity of the
borrower, or pledged collateral. Doubtful loans have all the inherent weaknesses in the substandard
classification and collection or liquidation in full is highly questionable. Loss loans are considered
uncollectible and of such little value that continuance as an active asset is not warranted. All other
loans not rated are considered to have a pass rating.
18
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
An analysis of the credit quality indicators is as follows at December 31:
2011
Commercial - non-real estate
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Construction
Residential
Commercial
Consumer - non-real estate
Automobile
Other
Residential
First trusts
Equity lines
Total
2010
Commercial - non-real estate
Commercial and industrial
Commercial real estate
Owner occupied
Non-owner occupied
Construction
Residential
Commercial
Consumer - non-real estate
Automobile
Other
Residential
First trusts
Equity lines
Total
Pass
Special
Mention
Substandard
Doubtful
Loss
$
35,268,280
$
462,327
$
506,313
$
28,301,984
43,806,859
3,601,659
4,723,506
978,838
3,906,394
7,216,075
5,092,036
328,952
1,357,415
9,330,217
8,048,732
138,750,550
$
-
-
737
-
-
-
$
8,788,229
$
1,400,125
-
-
-
-
367,073
7,158,743
$
$
29,804,882
$
1,600,214
$
698,143
$
32,473,510
35,196,339
2,803,806
5,363,986
-
-
$
$
$
-
-
-
-
-
-
-
-
-
-
-
-
-
3,683,339
5,959,134
218,165
1,878,980
10,133,274
8,602,592
127,950,215
$
-
-
9,893
-
-
183,958
9,961,857
$
1,556,000
-
-
-
-
-
$
2,254,143
$
221,274
-
-
-
-
-
221,274
$
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
An analysis of troubled debt restructurings at December 31 is as follows:
2011
2010
Pre-Modification Post-Modification
Pre-Modification Pre-Modification
Number of
Contracts
Oustanding
Recorded
Investment
Outstanding
Recorded
Investment
Number of
Contracts
Outstanding
Recorded
Investment
Outstanding
Recorded
Investment
Commercial and industrial
Commercial real estate
$
2
1
612,780
1,631,300
$
612,780
1,631,300
1
$
521,472
$
521,472
-
-
-
The Bank has no additional funds committed to be advanced in connection with the troubled
debt restructured loans.
19
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
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 $3,204,093 and $3,636,656 at
December 31, 2011 and 2010, respectively. New loans made to such related parties including loans
held by new directors, amounted to $3,116,244 and $1,354,811 and payments amounted to $3,548,807
and $2,899,311 at December 31, 2011 and 2010, respectively.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipmentincludethe following:
tnempiuqednaerutinruF
Leasehold improvements
Software
Total Cost
Lessaccumulated depreciation
NetBankPremises and Equipment
2011
1,084,629
130,959
300,562
1,516,150
(1,302,293)
213,857
$
$
2010
1,077,548
130,959
300,562
1,509,069
(1,193,295)
315,774
$
$
Depreciation of bank premises and equipment charged to expense amounted to $108,998 and
$155,620 in 2011 and 2010, respectively.
6. DEPOSITS
Time deposits in denominations of $100,000 or more totaled $79,879,691 and $61,346,589 at December
31, 2011 and 2010, respectively.
The following are time deposits maturing in years ending December 31:
2012
2013
2014
2015
2016 and thereafter
Total
$
79,231,485
23,920,559
1,351,629
2,002,329
8,305,182
$
114,811,184
The Bank held related party deposits of approximately $3,921,000 and $4,894,000 at December 31,
2011 and 2010, respectively.
20
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
7. BORROWINGS
THE FREEDOM BANK OF VIRGINIA
At December 31, 2011 and 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, 2011 and 2010.
At December 31, 2011 and 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, 2011 and 2010.
8.
INCOME TAXES
Significant components of deferred income tax assets and liabilities are as follows at December 31:
Deferred Source
Net operating loss carryforward
Loan loss reserve
Unearned loan fees
Depreciation
Gross deferred tax assets
Valuation allowance
Net deferred tax assets
$
2011
490,000
1,151,000
99,000
(17,000)
1,723,000
(1,111,000)
$
2010
1,251,000
1,033,000
106,000
(22,000)
2,368,000
(1,756,000)
$
612,000
$
612,000
The Bank has net operating losses carried forward of approximately $1,442,000 at December 31, 2011,
which start to expire in 2023. The Bank had a current year net operating loss carryforward benefit of
$761,000.
The provision for income taxes consists of the following at December 31:
Current tax expense
Deferred tax expense
Change in valuation allowance
2011
-
645,000
(645,000)
2010
$
-
602,000
(1,214,000)
-
$
(612,000)
$
$
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
2011
2010
34%
-
(34)
0%
34%
1
(69)
(34)%
21
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
9.
CAPITAL REQUIREMENTS
THE FREEDOM BANK OF VIRGINIA
The Bank is subject to various regulatory capital requirements administered by 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, 2011, that the Bank meets all the capital adequacy
requirements to which it is subject.
As of December 31, 2011, 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 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.
22
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
The Bank’s actual capital amounts and ratios as of December 31, 2011 and 2010 are as follows:
Actual
Amount
Ratio
For Capital
Adequacy Purposes
Amount
Ratio
Minimum to be Well
Capitalized Under
Prompt Corrective
Action Provisions
Amount
Ratio
December 31, 2011:
Total Capital
(to Risk Weighted
Assets)
$
23,697,402
14.52%
$
13,058,320
8.00%
$
16,322,900
10.00%
Tier 1 Capital
(to Risk Weighted
Assets)
$
23,562,626
14.44%
$
6,529,160
4.00%
$
9,793,740
6.00%
Tier 1 Capital
(to Average Assets)
$
23,562,626
12.85%
$
7,335,889
4.00%
$
9,169,861
5.00%
December 31, 2010:
Total Capital
(to Risk Weighted
Assets)
$
21,575,018
14.91%
$
11,575,760
8.00%
$
14,469,700
10.00%
Tier 1 Capital
(to Risk Weighted
Assets)
$
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%
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 Board approved increasing the number of
authorized shares from 250,000 to 400,000 during 2011. The authorized and granted options under the
Plan are as follows:
2007 Plan
Authorized
400,000
Granted
301,900
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.
23
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
The following summarizes the option activity under the Stock Option Plan:
Outstanding, December 31, 2009
Grants
Exercised
Canceled or expired
Outstanding, December 31, 2010
Grants
Exercised
Canceled or expired
Outstanding, December 31, 2011
Number of
Shares
Option Price
Per Share
99,400
50,000
-
-
149,400
152,500
-
-
301,900
$
$
14.65
8.83
-
-
12.70
9.93
-
-
11.30
Weighted
Average
Exercise Price
$
-
8.83
-
-
12.70
9.93
-
-
$
11.30
The weighted average fair value of options granted during the year ended December 31, 2011 was
$1.38. The weighted average remaining contractual life of options outstanding as of December 31,
2011 is 8.4 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 the 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 5.00 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.
The Bank’s compensation plan for the Board of Directors provides for payments for attending
regularly scheduled meetings of the Board of Directors as well as subcommittee meetings. The plan
requires payment to be made in the form of Bank stock to be accrued in the current year and paid out
in the first quarter of the following year.
For the years ended December 31, 2011 and 2010, the Bank recognized stock-based compensation
expense of $138,742 and $40,450, respectively.
24
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
11. OPERATING LEASES
THE FREEDOM BANK OF VIRGINIA
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 July 2011, the Bank renewed its 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 five years
commencing August 1, 2011 and ending July 31, 2016. Total base annual lease payments are $148,764
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 one period of five 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, 2011:
Years ending December 31:
2012
2013
2014
2015
Thereafter
$
435,305
449,766
464,732
245,755
97,671
$
1,693,229
Rent expense amounted to $454,993 and $448,441 for the years ended December 31, 2011 and 2010,
respectively.
25
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
12.
FAIR VALUE MEASUREMENTS
THE FREEDOM BANK OF VIRGINIA
During 2011, the Bank changed the assessment of inputs used in measuring fair value for both years
for available-for-sale securities to resemble the assessments used by their broker.
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, 2011:
December 31, 2011
Available-for-sale securities
$
15,183,798
Fair Value
December 31, 2010
Available-for-sale securities
$
5,767,655
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
$
$
-
-
Significant
Other
Observable
Inputs
(Level 2)
$
15,183,798
$
5,767,655
Significant
Unobservable
Inputs
(Level 3)
$
$
-
-
26
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP.
Adjustments
lower-of-cost-or-market accounting or write-downs of individual assets.
these assets usually result from
the fair value of
the application of
to
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
$
5,458,743
$
-
$
5,072,248
$
386,495
$
2,298,746
$
-
$
2,298,746
$
-
December 31, 2011
Impaired loans
December 31, 2010
Impaired loans
27
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
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 due from banks: The carrying amounts of cash and due from banks approximate their
fair value.
Interest bearing deposits with banks: The carrying amounts of interest bearing deposits with banks
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.
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.
Loans held for sale: The carrying amount is the lower of aggregate cost or fair value. The
estimated fair value is dependent upon the terms of the outstanding loan purchase
commitments as well as movement in market interest rates.
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 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, 2011 and 2010, the fair values of loan
commitments and standby letters of credit are immaterial. Therefore, they have not been
included in the following table.
28
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
THE FREEDOM BANK OF VIRGINIA
The estimated fair values of the Bank’s financial instruments are as follows at December 31:
Financial assets
Cash and due from banks
Interest bearing deposit
with banks
Federal funds sold
Securities available-for-sale
Loans held for sale
Securities held-to-maturity
Loans receivable, net
Accrued interest receivable
2011
Carrying
Amount
Fair Value
2010
Carrying
Amount
Fair Value
$
16,128,032
$
16,128,032
$
3,441,325
$
3,441,325
1,007,339
15,753,000
15,183,798
3,007,500
666,152
154,407,193
519,450
1,007,339
15,753,000
15,183,798
3,007,500
689,358
155,583,607
519,450
-
17,212,000
5,767,655
992,551
2,004,489
138,339,572
517,293
-
17,212,000
5,767,655
992,551
2,056,404
140,358,633
517,293
Total Financial Assets
$
206,672,464
$
207,872,084
$
168,274,885
$
170,345,861
Financial liabilities
Non-interest bearing deposits
Interest bearing deposits
Time deposits
Accrued interest payable
$
25,392,303
42,942,835
114,811,184
58,642
$
25,392,303
42,942,835
113,941,222
58,642
$
29,797,798
19,869,397
99,455,768
71,235
$
29,797,798
19,869,397
97,642,988
71,235
Total Financial Liabilities
$
183,204,964
$
182,335,002
$
149,194,198
$
147,381,418
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 sheets.
Financial instruments whose contract amount represents credit risk were as follows:
Commitments to extend credit
$
53,813,651
$
42,092,564
Standby letters of credit
$
1,150,862
$
416,202
2011
2010
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.
29
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2011 AND 2010
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 2011 or 2010.
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, 2011 and 2010, 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, which 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 $77,082 and $68,904 for the years ended December 31,
2011 and 2010, respectively.
16. LEGAL CONTINGENCIES
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.
17. SUBSEQUENT EVENT
On February 22, 2012, the Bank declared a six-for-five stock split of common stock. The stock split will
be effective for shareholders of record on February 16, 2012.
30
BOARD OF DIRECTORS AND SENIOR MANAGEMENT
THE FREEDOM BANK OF VIRGINIA
BOARD OF DIRECTORS
Richard C. Litman
Chairman of the Board
Cynthia Carter Atwater
Corporate Secretary
G. Thomas Collins, Jr.
Terry L. Collins, Ph.D.
H. Jason Gold
Norman P. Horn
David C. Karlgaard, Ph.D.
Michael A. Miranda
Alvin E. Nashman, Ph.D.
John T. Rohrback
Craig S. Underhill
President & Chief Executive Officer
EXECUTIVE MANAGEMENT
Craig S. Underhill
President & Chief Executive Officer
Karin M. Johns
Executive Vice President
& Chief Financial Officer
Robert D. Willey, Jr.
Executive Vice President, Commercial Lending
SENIOR MANAGEMENT
Deborah A. Free
Senior Vice President
& Branch Administration Officer
Joan E. Liszka
Senior Vice President
& Assistant Corporate Secretary
Kimberly J. Ryman
Senior Vice President
& Senior Administration & Information Officer
31
DIRECTORS EMERITUS & ADVISORY BOARD
THE FREEDOM BANK OF VIRGINIA
WITH DEEPEST APPRECIATION FOR THE
DIRECTORS WHO PREVIOUSLY SERVED
emosweN .N semaJ
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
3002 - 0002
mairomeM nI
nietsnreB gnivrI
Founding Director
2000 - 2007
Director Emeritus
William G. Dukas
Founding Director
2000 - 2011
In Memoriam
nietsnreB nerraD
nietsnreB gnivrI
William C. Bogart
Louis M. Cocks, Jr.
natsirtnoC .B ymmiJ
John R. Herbert
Timothy P. Hecht
Michael J. Kurka
David C. Knapp
sakuD .C egroeG
Director
2002 - 2005
Director Emeritus
Michael A. Falke
Founding Director
2000 - 2002
Timothy P. Hecht
Director
7002 - 5002
sutiremE rotceriD
saiztnoK .Z egroeG
Director
2002 - 2006
Director Emeritus
namrehS .E llessuR
Founding Director
2000 - 2007
In Memoriam
Harry N. Snyder, O.D.
Founding Director
2000 - 2007
Director Emeritus
James F. Steffey
Founding Director
2000 - 2007
sutiremE rotceriD
C. Stephen Templeton
Founding Director
2000 - 2002
Director Emeritus
Charles M. Wright
Founding Director
2000 - 2002
Director Emeritus
ADVISORY BOARD
,notepirP selyL enelrA
Chairman
ittongaM .A leahciM
reyaM .J dlanoD
Owen Michael McCall
Stephen W. McCarthy
helsiM .H amasU
Ali R. Oskuie
Thomas J. Riley
Harry N. Snyder, O.D.
yeffetS .F semaJ
navilluS .J leahciM
C. Stephen Templeton
Thomas J. Tracy
renruT .M nehpetS
Robert G. Williams
Charles M. Wright
Theodore A. Yiannarakis
32
OFFICERS & STAFF
THE FREEDOM BANK OF VIRGINIA
COMMERCIAL LENDING
Robert D. Willey, Jr.
Executive Vice President, Commercial Lending
Jeremiah D. Behan
Senior Vice President
& Real Estate Lending Officer
Michael A. Marsden
Vice President
& Relationsihp Management Officer
Government Lending
James T. Nelson
Senior Vice President
Corporate Banking Division
Paula A. Newsome
Vice President
& Relationship Management Officer
Michael J. Underwood
Senior Vice President
& Relationship Management Officer
Karla V. Wills
Vice President
& Retail Banking Officer
LOAN ADMINISTRATION
Kimberly J. Ryman
Senior Vice President
& Senior Administration & Information Officer
MORTGAGE LOAN
George J. Decker
Vice President
& Mortgage Loan Originator
William T. Rogers
Mortgage Loan Originator
Frederic V. Wilson
Mortgage Loan Originator
OPERATIONS
Karin M. Johns
Executive Vice President
& Chief Financial Officer
INVESTOR RELATIONS, HUMAN RESOURCES, MARKETING
Joan E. Liszka
Senior Vice President
& Assistant Corporate Secretary
BRANCHES
Deborah A. Free
Senior Vice President
& Branch Administration Officer
G. Veronika Cavero
Branch Operations Manager
Alfredo G. Molina
Branch Manager
33
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 - Memeber Allpoint Network
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
34
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 - Member Allpoint Network
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
35
Page intentionally left blank
Freedom Bank of Virginia
P.O. Box 4510, Fairfax, Virginia 22038-4510
703.242.5300
www.freedombankva.com