Freedom Bank of Virginia
Annual Report 2012

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FAIRFAX VIENNA 2012 FINANCIAL RESULTS FINANCIAL HIGHLIGHTS ) s n o i l l i m n i ( t n u o m A $180 $160 $140 $120 $0 ) s n o i l l i m n i ( t n u o m A $240 $220 $200 $180 $160 $140 $0 TOTAL LOAN GROWTH $140,074,925 $154,407,193 $171,901,847 2010 2011 Year 2012 TOTAL ASSET GROWTH $238,642,144 $207,557,264 $171,350,118 2010 2011 Year 2012 Freedom Bank oF Virginia • 2012 annual report ) s n o i l l i m n i ( t n u o m A $40 $35 $30 $25 $20 $15 $0 ) s n o i l l i m n i ( t n u o m A $225 $205 $185 $165 $145 $125 $0 TOTAL DEMAND DEPOSIT GROWTH (non-interest bearing) $29,797,798 $25,392,303 $34,951,109 2010 2011 Year 2012 TOTAL DEPOSIT GROWTH $212,575,742 $183,146,322 $149,122,963 2010 2011 Year 2012 Financial HigHligHtS a letter to our SHAREHOLDERS On behalf Of the bOard Of directOrs and emplOyees Of the freedOm bank Of Virginia, we are pleased to report our results for 2012. Freedom Bank had another year of strong financial performance in 2012, its third consecutive year of profitability. Total assets, loans and checking account balances all ended at record highs. Asset quality also improved, in terms of both timely payments and a reduction in non-performing assets. The Bank’s capital exceeded $25,000,000 for the first time at a year end. Stockholder’s equity at December 31, 2012 was $25,264,084, up 6.61% from $23,697,402 at December 31, 2011. Year end book value per share was $8.81, up 5.51% from $8.35 the prior year. Capital continues to be a strength of the Bank. Regulatory capital minimums to be considered well capitalized 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. At December 31, 2012, the ratios for the Bank were 11.06%, 13.80% and 15.03% 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. The Bank has focused for many years on serving the banking needs of the government contractors in the region. Deposits increased over the prior year by 16.05% in part because of this customer base. Non-interest bearing deposits increased $9,558,806 (37.64%) to $34,951,109, while interest bearing checking accounts dropped $5,071,905 (12.17%) to $36,601,864 and time deposits increased $29,429,419 (21.55%) to $139,555,489 at December 31, 2012. Because of our growth in deposits and shareholder’s equity, the assets of the Bank grew to $238,642,144 at December 31, 2012 up 14.98% from $207,557,264 at year end 2011. Investment Securities Available for Sale increased $13,533,997 (89.13%) to $28,717,795 at December 31, 2012. Double digit gross loan growth for the year resulted from the Bank’s investment in additional business development and lending officers. New lenders made a significant contribution in the fourth quarter particularly with loans to medical professionals. These loans helped gross loans increase 11.33% to $171,901,847 at year end, up from $154,407,193 at December 31, 2011. The Bank also increased the Provision for Possible Loan Losses by $340,200 over the prior year and had an increased compensation expense of $270,000 in the fourth quarter. Asset quality improved significantly in 2012. Loans on which the Bank is no longer accruing interest was halved from 2.43% of total loans at December 31, 2011 to 1.21% at December 31, 2012. Loans past due for regularly scheduled payments declined from 1.67% at December 31, 2011 to 0.23% at December 31, 2012. The Bank earned a net profit in 2012 of $1,192,000 ($0.42 per share), down from $1,900,300 in 2011 ($0.67 per share), which is due principally to the highlighted investments the Bank made in additional staff and improving asset quality. Barring deterioration in the local economy, the Bank’s achievements position it for continuing growth in 2013 by adding staff and locations. In addition, the Bank has formed an investment banking subsidiary, FBV Capital Partners, Inc., which, when approved by the Financial Industry Regulatory Authority (FINRA), will provide merger and acquisitions advisory services. Building on our success in the government contracting market, this subsidiary will focus primarily on this industry segment. To lead the effort, the Bank hired Robert N. Rubin, a well-known and successful investment banker with over twenty years experience assisting companies with mergers and acquisitions in the local market. The Bank is seeking FINRA approval to acquire a broker dealer license which it expects to receive in the near future. Although merger and acquisition transactions have long lead times and revenues from these services will not be immediate, we believe our industry knowledge and relationships will enable the Bank to enhance its market penetration and generate fee income from these services. The Board of Directors approved new deferred compensation plans in 2012, effective for 2013, for both the Board and the executive officers that include an option to invest in the Bank’s stock. The plans do not provide any additional compensation, but change the present means of compensation. The Board members now have the option to participate in a deferred compensation plan that includes a Freedom Bank Stock Fund, among other investment options. We are pleased to inform you that 100% of eligible directors agreed to participate in the Freedom Bank Stock Fund for 2013. A similar plan was offered to executives who were allowed to defer up to fifteen percent of compensation into a deferred compensation plan that includes a Freedom Bank Stock Fund, among other investment options. Like the directors, 100% of eligible current employees elected to participate in the Freedom Bank Stock Fund. These new plans are expected to increase the volume of shares traded and provide a strong economic incentive to both management and directors to increase the value of the Bank’s shares over time. We thank you for your continued support of the Bank and hope to see you at our annual meeting. Craig S. Underhill president & ceO Richard C. Litman chairman TABLE OF CONTENTS Independent Auditor’s Report 2 Financial Statements balance sheets statements of operations statements of comprehensive income statements of changes in stockholders’ equity statements of cash flows notes to financial statements 3 5 6 7 8 11 Shareholder & Company Information 38 INDEPENDENT AUDITOR’S REPORT To The Board of direcTors & sTockholders The Freedom Bank of Virginia Vienna, Virginia We have audited the accompanying financial statements of The Freedom Bank of Virginia, which comprise the balance sheets as of December 31, 2012 and 2011, and the related statements of operations, comprehensive income, changes in stock- holders’ equity and cash flows for the years then ended, and the related notes to the financial statements. Management’s Responsibility for the Financial Statements Management is responsible for the preparation and fair presentation of these financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error. 2 Auditors’ Responsibility Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in ac- cordance 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 involves performing procedures to obtain audit evidence about the amounts and disclosures in the financial statements. The procedures selected depend on the auditors’ judgment, including the assessment of the risks of material misstatement of the financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the entity’s internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by manage- ment, as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion. 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, 2012 and 2011, and the results of its operations and its cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America. Thompson, Greenspon & Co., P.C. Fairfax, Virginia March 20, 2013 independent auditor’S report FINANCIAL STATEMENTS Balance Sheets YEARS ENDED DECEMBER 31 2012 & 2011 Assets 2012 ($) 2011 ($) Cash and Due from Banks 1 0,884,094 1 6, 1 2 8,03 2 Interest Bearing Deposits with Banks 1 ,0 1 6,006 1 ,007,33 9 Federal Funds Sold 1 8,78 8,000 1 5,75 3,000 Securities available-for-Sale 28,7 1 7, 7 9 5 1 5, 1 83,7 98 3 Securities Held-to-maturity Federal reserve Bank Stock (at cost) loans Held for Sale loans receivable 348,6 1 6 746,6 50 666, 1 5 2 689,350 3,656,8 2 9 3,007,500 1 7 1 ,90 1 ,84 7 1 54,40 7, 1 9 3 allowance for possible loan losses (2,236,8 22) (2,03 7, 1 64) net lOans 169,665,02 5 152,370,029 Bank premises and equipment (net) accrued interest receivable deferred tax asset Other Assets 1 99,500 607, 2 7 6 6 1 2,000 2 1 3,8 5 7 5 1 9,450 6 1 2,000 1 ,357, 1 7 8 1 ,406,7 5 7 Bank-owned life insurance 2,043, 1 7 5 — tOtal assets 238,642, 1 44 207,557,264 Financial StatementS liAbilities Deposits Demand Deposits non-interest Bearing Interest Bearing Savings Deposits Time Deposits tOtal depOsits other accrued expenses accrued interest payable tOtal liabilities 2012 ($) 2011 ($) 34,95 1 , 1 09 25,39 2,30 3 36,60 1 , 864 4 1 ,67 3, 7 70 1 ,46 7, 280 1 ,269,06 5 139,5 5 5,48 9 1 1 4,8 1 1 , 1 8 4 2 1 2,5 75,7 4 2 1 8 3, 1 46,3 2 2 73 2,4 6 6 654,8 9 8 69,8 5 2 58,64 2 2 1 3,378,060 183,859,86 2 4 stockholders’ equity common stock ( $4.17 par value, 5,000,000 shares authorized: (2,866,117 Shares issued & outstanding [2012]; 2,836,404 Shares issued & outstanding [2011]) 1 1 ,94 2,2 2 8 1 1 ,8 1 8,3 2 5 additional paid-in capital 1 6,284,30 3 1 6, 1 84,8 1 0 accumulated other comprehensive income (net) 285,80 9 1 34,7 7 6 retained deficit (3,248,2 56) (4,440,509) tOtal stOckhOlders’ equity 25,264 ,084 23,69 7,40 2 tOtal liabilities & stOckhOlders’ equity 238,642, 1 44 207,55 7,2 64 NOTE: The Notes to Financial Statements are an integral part of these statements. Freedom Bank oF Virginia • 2012 annual report Statements of Operations YEARS ENDED DECEMBER 31 2012 & 2011 interest income interest & Fees on loans 2012 ($) 2011 ($) 9,305 ,59 5 9, 1 1 0,3 1 2 interest on investment Securities 5 74 ,36 1 399,4 2 7 interest on Federal Funds Sold 40,9 93 38,6 6 2 tOtal interest incOme 9,920,949 9,548,40 1 interest expense Interest on Deposits 2,008,65 3 1 ,86 1 ,8 2 8 net interest incOme 7,91 2,2 96 7,686,5 7 3 provision for possible loAn losses 688,200 348,000 5 net interest incOme after 7,224,096 7,338,5 7 3 other income Service charges & other income 83 2,64 1 568,02 8 increase in cash Surrender Value of Bank-owned life insurance 4 3, 1 75 — tOtal Other incOme 875 ,8 1 6 568,02 8 operAting expenses officers & employee compensation & Benefits 4,094,03 1 3,406,08 9 occupancy expense equipment & depreciation expense insurance expense 5 1 0,7 76 1 88,44 2 1 79, 1 05 530,3 2 8 2 1 8, 75 2 24 1 ,8 78 Financial StatementS operAting expenses cont’d 2012 ($) 2011 ($) professional Fees data & item processing Business development Franchise taxes other operating expenses 548,74 8 607,38 8 1 2 3,4 5 5 22 6 , 1 1 0 429,604 398,5 68 534,008 1 24,8 5 1 202,9 5 5 348,8 7 2 tOtal Operating expenses 6,907,659 6,006,30 1 incOme befOre incOme taxes 1 ,1 92,2 53 1,900,300 income tAx expense — — NEt iNCoME 1 ,1 92,2 53 1,900,300 NEt iNCoME pER CoMMoN ShARE 6 NEt iNCoME pER DilutED ShARE 0.42 0.42 0.67 0.67 Statements of Comprehensive Income YEARS ENDED DECEMBER 31 2012 & 2011 2012 ($) 2011 ($) net income 1 , 1 92,25 3 1,900,300 other comprehensive income: (unrealized holding gain arising during the year, net of tax expense of $81,326 in 2012 and $26,179 in 2011 1 5 1,0 3 3 48, 6 1 7 cOmprehensiVe incOme 1,3 43,28 6 1,94 8,9 1 7 NOTE: The Notes to Financial Statements are an integral part of these statements. Freedom Bank oF Virginia • 2012 annual report Statements of Changes in Stockholders’ Equity YEARS ENDED DECEMBER 31 2012 & 2011 shAres of common stock ($) common stock ($) AdditionAl pAid-in cApitAl ($) AccumulAted other comprehensive income ($) retAined eArnings ($) (deficit) totAl stockholders’ equity ($) bAlAnce (dec. 31, 2010) net income comprehensive income *2,357, 3 6 1 1 1 ,786,805 16,042,863 8 6, 1 5 9 (6,340,809) 2 1 ,575,0 1 8 — — — — — — — 1 ,900,300 1,900,300 48,6 1 7 — 48,6 1 7 issuance of common Stock 6,304 3 1 ,5 20 3,205 Stock-based compensation — — 1 3 8,742 — — — — 34,7 2 5 1 38 ,74 2 *2,3 63,665 1 1 ,81 8,3 2 5 16,1 84,8 1 0 134,7 7 6 (4,440,509) 23,697,402 7 bAlAnce (dec. 31, 2011) net income comprehensive income — — — — — — — — Six-for-five Stock Split 472,7 39 issuance of common Stock 2 9 ,7 1 3 12 3,903 65,0 59 Stock-based compensation — — 34,434 — 1 , 1 92 , 2 5 3 1 , 1 9 2, 2 53 1 5 1 ,0 3 3 — — — — — — 1 5 1 ,03 3 — 1 8 8,9 6 2 — 34,4 34 bAlAnce (dec. 31, 2012) 2,86 6 , 1 1 7 1 1 ,942,22 8 1 6,284,303 285,809 (3,248,256) 25,264,084 *Shares of common stock retroactively adjusted for the six-for-five stock split is 2,836,404 and 2,828,833 as of December 31, 2011 and 2010, respectively. NOTE: The Notes to Financial Statements are an integral part of these statements. Financial StatementS Statements of Cash Flows YEARS ENDED DECEMBER 31 2012 & 2011 cAsh flows from operAting Activities 2012 ($) 2011 ($) Net Income 1 , 1 92 ,2 5 3 1,900,300 Non-Cash Items Included in Net Income depreciation & amortization 85, 8 9 5 1 08,9 9 8 provision for possible loan losses 68 8,200 348,000 net amortization of available-for-Sale Securities 42 2,3 7 5 6 7,42 0 gain on Sale of available-for-Sale Securities (7,872) (72,500) Stock-based compensation expense 34,434 1 3 8 ,7 4 2 8 increase in cash Surrender Value of Bank-owned life insurance (43,175) — (Increase) Decrease in loans Held for Sale accrued interest receivable Other Assets Increase (Decrease) in other accrued expenses accrued interest payable (649, 329) (2,0 1 4,949) (87 ,826) (2 , 1 5 7) 49,5 7 9 1 2 5, 1 0 2 (3,758) 47, 8 1 7 1 1 , 2 1 0 (1 2, 5 93) net cash prOVided by Operating actiVities 1,69 1 , 98 6 634, 1 80 NOTE: The Notes to Financial Statements are an integral part of these statements. Freedom Bank oF Virginia • 2012 annual report cAsh flows from investing Activities 2012 ($) 2011 ($) Federal Funds Sold (net) (3,035,000) 1 ,459,000 Interest Bearing Deposit with Banks (8,66 7) (1,007, 339) loan organizations (net) (1 7,983 , 1 96) (14,378,457) purchase of available-for-Sale Securities (1 1 , 223,645) maturities, calls & paydowns of Securities available-for-Sale 10,330, 5 73 8 1 4, 8 7 8 proceeds from Sales of Securities available-for-Sale 2, 1 39,5 6 7 1 ,072,500 purchase of Bank-owned life insurance (2,000,000) — paydowns of Held-to-maturity Securities 3 1 7,5 3 6 1 ,338,3 3 7 purchase of Federal reserve Bank Stock (57,300) (73 , 750) acquisition of Bank equipment (7 1 ,5 38) (7,0 8 1 ) net cash used by inVesting actiVities (36,554,306) (22,005,5 57) cAsh flows from finAncing Activities 9 increase in deposits (net) common Stock issuance 29,429,420 34,023, 3 5 9 1 88,9 6 2 34, 7 2 5 net cash prOVided by financing actiVities 29,6 1 8,3 8 2 34,058,084 net (decreAse) increAse in cAsh & due from bAnks (5,243,9 3 8) 1 2,686,70 7 cash & due frOm banks (beginning Of year) 1 6, 1 28,03 2 3,44 1 , 32 5 cash & due frOm banks (end Of year) 10,884,094 1 6,1 28,03 2 NOTE: The Notes to Financial Statements are an integral part of these statements. Financial StatementS noncAsh investing Activity 2012 ($) 2011 ($) unrealized gain On securities aVailable-fOr-sale (net) 1 5 1 ,03 3 48,6 1 7 supplementAl informAtion cash paid during the year fOr interest 1,997,443 1 ,874,4 2 1 cash paid during the year fOr incOme taxes 1 60,000 80,000 10 NOTE: The Notes to Financial Statements are an integral part of these statements. Freedom Bank oF Virginia • 2012 annual report Notes to Financial Statements DECEMBER 31 2012 & 2011 1. Nature of Operations & 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 manage- ment to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of con- tingent 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. 11 iNterest BeariN g Deposits with BaNks The Bank maintains an interest bearing deposit with another institution in Virginia. Interest bearing deposits are valued at cost. Interest income is recorded as interest income on investment securities. 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 avail- able-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 is evaluated annually for impairment. The stock is required in order to be a member of the Federal Reserve. LoaNs aND LoaN fees 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. Financial StatementS 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. Income from loans sold is included in service charges and other income on the financial state- ments. Income from loans sold was $564,431 and $290,709 for the years ended December 31, 2012 and 2011, respectively. 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 collect- ability 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 agree- ment. 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. BaNk premises aND equipmeNt Bank premises and equipment are stated at cost, less accumulated depreciation and amortization. Leasehold improve- ments 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 are 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. 12 Freedom Bank oF Virginia • 2012 annual report other reaL e state owNeD Real estate properties acquired through or in lieu of loan foreclosures are initially recorded at the fair value less esti- mated 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 prop- erty 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, 2012 and 2011. other assets Included in other assets is approximately $604,000 and $739,000 as of December 31, 2012 and 2011, respectively, of pre- paid expense related to the required prepayment of the FDIC premium through the fourth quarter of 2012. BaNk-owNeD Life iNsura Nce The Bank entered into bank-owned life insurance policies during 2012 that are maintained by two counterparties. Under the bank-owned life insurance policies, executives or other key individuals are the insured and the Bank is the owner and beneficiary of each policy. As such, the insured has no claim to either the insurance policy, cash value, or a portion of the policy’s death proceeds. The increase in the cash surrender value over time is recorded as other non-interest income. The Bank monitors the financial strength and condition of both counterparties. stockhoLDers’ equity At December 31, 2012, warrants were outstanding and exercisable to purchase 278,507 shares of common stock at $11.04 per share if exercised by January 15, 2015, and 53,880 shares of common stock at $11.04 per share if exercised by February 16, 2015. The amounts and number of warrants have been adjusted for the six-for-five stock split that was effective on February 16, 2012. 13 Comprehensive income represents all changes in equity that result from recognized transactions and other economic events of the period. Other comprehensive income 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. iNcome taxes 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 carryfor- ward 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. 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 2011, 2010 and 2009 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. Financial StatementS earNiNgs per share (eps) Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted- average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Bank. The Bank does not have any contracts or options with a dilutive effect; therefore, basic EPS and diluted EPS are equal. stock-BaseD compeNsatioN The Bank recognizes the cost of employee services received in exchange for an award of equity instruments in the finan- cial 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 op- tions to extend for additional one year periods until employment is terminated under specific conditions as provided in the agreements. statemeNts of cash fLows 14 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 periodi- cally has bank deposits, including short-term investments, in excess of Federally insured limits. off-BaLaNce sheet creDit reLateD fi NaNciaL 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, 2012, the date of the most recent balance sheet, have been evalu- ated for possible adjustment to the financial statements or disclosure is March 20, 2013, which is the date on which the financial statements were available to be issued. 2. Restriction of Cash & 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, 2012 and 2011 was $1,024,000 and $712,000, respectively. Freedom Bank oF Virginia • 2012 annual report 3. Securities Available-for-Sale & Held-to-Maturity The amortized cost and fair values of securities as shown in the balance sheets of the Bank are as follows: Amortized costs ($) gross unreAlized gAins ($) gross unreAlized losses ($) fAir vAlue ($) dec. 31, 2012 Available-for-Sale u.S. gov’t & agency Securities 2,500,000 24,2 3 3 corporate Securities 1,75 8,685 7 1 ,0 1 6 — — 2,524,23 3 1,829, 70 1 mortgage-backed Securities 19,22 7, 7 70 295,9 1 5 (3 9, 1 3 4) 19,484,55 1 municipal Securities 534,4 7 8 1 5,9 6 2 SBa loan pools 4,2 57 , 1 5 5 7 1 , 7 1 5 — — 550,440 4,328,870 tOtal aVailable-fOr-sale 28,278,08 8 478,8 4 1 (39,1 34) 28, 7 1 7,795 Held-to-Maturity mortgage-backed Securities 348, 6 1 6 8,03 6 — 356,652 15 tOtal inVestment securities 28,626,704 486,87 7 (3 9, 1 34) 29,074,447 dec. 31, 2011 Available-for-Sale u.S. gov’t & agency Securities 4,000,000 32,4 5 1 — 4,032, 45 1 corporate Securities 2,036,3 5 9 42, 7 1 9 (7,2 92) 2,07 1 ,7 8 6 mortgage-backed Securities 8,940,09 2 149, 3 8 3 (9, 9 1 4) 9,079, 56 1 tOtal aVailable-fOr-sale 14,976,4 5 1 224,55 3 (1 7,206) 1 5,1 83,798 Held-to-Maturity mortgage-backed Securities 666, 1 5 2 23,206 — 689,3 58 tOtal inVestment securities 15,642,60 3 247,75 9 (1 7,206) 15,873,1 5 6 Financial StatementS The amortized cost and estimated fair value of debt securities at December 31, 2012, by contractual maturity, are as follows: Amounts Maturing in: 1 Year or less after 1 Year - 5 Years after 5 Years - 10 Years after 10 Years AvAilAble-for-sAle held-to-mAturity Amortized costs ($) gross unreAlized gAins ($) gross unreAlized losses ($) fAir vAlue ($) 8 1 3, 03 5 828, 65 8 3,44 5, 650 3,525 , 276 5 34 ,478 550,440 4,25 7, 1 5 5 4,3 28,8 70 9,050,3 1 8 9,233,24 4 — — — — — — — — — — mortgage-backed Securities 19,227,7 70 1 9,48 4, 5 5 1 348,616 356,652 28, 278,08 8 28, 7 1 7,795 348,616 356,652 16 Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obliga- tions with or without call or prepayment penalties. At December 31, 2012 and 2011, U.S. Government and agency securities and mortgage backed securities with a carrying value of $19,804,687 and $6,897,234, respectively, were pledged to secure public deposits and for other purposes required or permitted by law. Information pertaining to securities with gross unrealized losses at December 31, 2012, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows: less thAn twelve months over twelve months gross unreAlized losses ($) fAir vAlue ($) gross unreAlized losses ($) fAir vAlue ($) Available-for-Sale corporate Securities — — mortgage-backed Securities 39, 134 2,245,542 Held-to-Maturity mortgage-backed Securities — — — — — — — — Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Freedom Bank oF Virginia • 2012 annual report At December 31, 2012, four debt securities with an unrealized loss for less than one year depreciated less than two percent from the Bank amortized cost basis. The securities are secured by mortgage loans. These unrealized losses relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition, management considers whether the securities are issued by the Federal government or its agencies, whether downgrades by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale, management feels that the unrealized losses on the securities are not deemed to be other-than-temporary. 4. Loans Receivable Loans receivable include the following: commercial consumer & other Real Estate subtOtal deferred loan Fees tOtals 2012 ($) 2011 ($) 37,6 1 5 , 0 1 3 36,236,920 5,39 5 , 1 0 5 1 ,6 8 7 ,1 04 1 29, 1 80 , 1 6 2 1 1 6 ,773,498 17 2,1 90,2 80 154,697, 522 (288,433) (290,329) 17 1 ,90 1 ,8 47 154,407, 193 17 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 condi- tions 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. 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: Financial StatementS commerciAl reAl estAte- reAl estAte- reAl estAte- & industriAl ($) commerciAl ($) construction ($) residentiAl ($) consumer ($) unAllocAted ($) totAl ($) 2012 Allowance for Possible Loan Losses Beginning Balances 274,35 2 1 , 1 76, 1 35 258,405 300, 1 90 1 3,879 14,203 2,037, 1 64 charge-offs — — (488,542) — — — — — — — — — (488,542) — provision 105,680 533,700 57,7 1 3 (29,549) 34,859 (14,203) 688,200 ending balance 380,032 1,221,293 3 1 6,1 1 8 270,64 1 48,738 — 2,236,822 individually evaluated for impairment 100,923 1 85,672 — 65,239 1 ,8 1 2 — 353,646 collectively evaluated for impairment 279,109 1,035,62 1 31 6, 1 1 8 205,402 46,926 — 1 ,883, 1 76 Loans Receivable ending balance 37,615,0 1 3 92,966,709 10,386,789 25,826,664 5,395,105 — 172,1 90,280 individually evaluated for impairment 489,783 1 ,63 1,300 1 , 23 1 ,029 391 ,964 6,1 82 — 3,750,258 18 collectively evaluated for impairment 3 7, 1 25,230 9 1 , 335,409 9, 1 55,760 25,434,700 5,388,923 — 168,440,022 2011 Allowance for Possible Loan Losses Beginning Balances 250,804 770,680 33 1 ,626 293,370 2 1 ,474 67,399 1, 735,353 charge-offs recoveries provision (30,982) 32,0 1 1 — — (49,000) 1 , 782 — — — — — — (79,982) 33,793 22,5 1 9 405,455 (26,003) 6,820 (7,595) (53,196) 348,000 ending balance 274,35 2 1 , 1 76,1 35 258,405 300,190 13,879 14,203 2,037,1 64 individually evaluated for impairment — 3 1 4,422 — 72,073 — — 386,495 collectively evaluated for impairment 274,35 2 86 1 ,7 1 3 258,405 228,117 1 3,879 14,203 1,650,669 Loans Receivable ending balance 36,236,920 85,3 19,24 1 13,708,236 17,746,021 1,687, 104 — 154,697,522 individually evaluated for impairment 506,313 3,1 85,232 1 ,400,1 25 — 367,073 — 5,458,743 collectively evaluated for impairment 35,730,607 82, 1 34,009 1 2, 308,1 1 1 17,746,021 1 ,320,03 1 — 149,238,779 Freedom Bank oF Virginia • 2012 annual report An analysis of non-accrual and past due loans is as follows at December 31: 30-59 dAys pAst due ($) 60-89 dAys pAst due ($) more pAst due ($) totAl pAst due ($) current ($) finAncing re- ceivAbles ($) nonAccruAl loAns ($) 90 dAys or totAl 2012 Commercial Non-Real Estate commercial & industrial Commercial Real Estate owner occupied non-owner occupied Construction Residential commercial Consumer Non-Real Estate automobile Other Residential First trusts equity lines tOtal — — — — — — — — — — — — — — — — — — — — — — — — — — 37,615,013 37,615,013 489,78 3 — 35,690,444 35,690,444 — 57,276,265 57,276,265 — — — 9,273,622 9,273,622 1 ,23 1 ,02 9 — 1 , 1 1 3 , 1 6 7 1 ,1 1 3 ,1 6 7 — 6,182 6,182 272,759 278,941 6, 1 8 2 19 — — — 5,1 1 6 ,1 6 4 5 ,11 6 ,1 64 — 17,533,926 17,53 3,926 — — 39 1,964 39 1,964 7,900,774 8,292,738 39 1 , 964 398,146 398,146 171,792,134 172,190,280 2,1 1 8,958 Financial StatementS 30-59 dAys pAst due ($) 60-89 dAys pAst due ($) more pAst due ($) totAl pAst due ($) current ($) finAncing re- ceivAbles ($) nonAccruAl loAns ($) 90 dAys or totAl 2011 Commercial Non-Real Estate commercial & industrial — — — — 36,236,920 36,236,920 506,3 1 3 Commercial Real Estate owner occupied 41 8,403 288,249 978,838 1,685,490 3 1 ,1 96,99 1 32,882,48 1 978,838 non-owner occupied Construction Residential commercial Consumer Non-Real Estate 20 automobile Other Residential First trusts equity lines — — — — 1,428 — — — — — — — — — — — — 52,436,759 52,436,759 — — 8,6 1 6,200 8,6 16,200 1,400,1 25 575,094 575,094 4,5 1 6,942 5,092,036 575,094 — — — — 329,689 329,689 1,428 1,355,987 1,357,4 1 5 — 9,330,217 9,330,217 — — — 367,073 367,073 8,048,732 8,415,805 367,073 tOtal 419,83 1 288,249 1,921,005 2,629,085 152,068,437 154,697,522 3,827,443 Freedom Bank oF Virginia • 2012 annual report An analysis of impaired loans based on loan segment is as follows at December 31: recorded investment ($) unpAid principAl bAlAnce ($) relAted AllowAnce for loAn losses ($) AverAge recorded investment ($) interest income recognized ($) 2012 With No related Allowance Recorded Construction Residential With an Allowance Recorded Commercial Non-Real Estate 1,231,029 1,23 1,029 — 1,388,575 commercial & industrial 489,783 489,783 100,923 497,204 Commercial Real Estate — — non-owner occupied 1,63 1,300 1,631,300 185,672 1,631,300 82,924 398,146 398,146 67,05 1 414,028 2,069 Consumer tOtal commercial non-real estate 489,783 489,783 100,923 497,204 residential construction 1,231,029 1,231,029 — 1,388,575 commercial real estate 1,63 1,300 1,631,300 185,672 1,631,300 82,924 Consumer 398,146 398,146 67,05 1 414,028 2,069 21 — — Financial StatementS recorded investment ($) unpAid principAl bAlAnce ($) relAted AllowAnce for loAn losses ($) AverAge recorded investment ($) interest income recognized ($) 2011 With No related Allowance Recorded Commercial Non-Real Estate commercial & industrial 506,3 1 3 506,3 1 3 — 514,397 Construction Residential With an Allowance Recorded Commercial Real Estate 1,400,1 25 1,400,1 2 5 — 1,501,502 — — owner occupied 978,838 978,83 8 38,750 982,930 43,5 1 1 non-owner occupied 2,206,394 2,781,488 275,672 2,203,121 90,707 22 Consumer tOtal 367,073 367, 252 72,073 367,252 2,380 commercial non-real estate 506,3 1 3 506,3 1 3 — 514,397 — commercial real estate 3,185,232 3,760,326 314,422 3,186,05 1 134,2 1 8 construction Consumer 1,400,1 25 1,400,1 2 5 — 1,501,502 — 367,073 367,25 2 72,073 367,252 2,380 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. Freedom Bank oF Virginia • 2012 annual report An analysis of the credit quality indicators is as follows at December 31: pAss ($) speciAl mention ($) substAndArd ($) doubtful ($) loss ($) 2012 Commercial Non-Real Estate commercial & industrial 35,8 18,776 1 ,306,454 489,783 Commercial Real Estate owner occupied 3 1 ,000,674 4,689,769 — non-owner occupied 48,590,585 5,079,38 1 3,606,300 Construction Residential commercial Consumer Non-Real Estate automobile Other Residential First trusts equity lines 8,042,593 1 , 1 1 3, 1 67 272,759 5 ,1 1 6,164 1 7,533,927 — — — — — 1,231,029 — 6,182 — — 7,799,592 101 ,180 391,965 tOtal 155,288,237 11,1 76,784 5,725,259 — — — — — — — — — — — — — — — — — — — — 23 Financial StatementS pAss ($) speciAl mention ($) substAndArd ($) doubtful ($) loss ($) 2011 Commercial Non-Real Estate commercial & industrial 35,268,280 462,327 506,3 13 Commercial Real Estate owner occupied 28,301,984 3,601,659 978,838 non-owner occupied 43,806,859 4,723,506 3,906,394 Construction Residential commercial Consumer Non-Real Estate 7, 2 1 6,075 5,092,036 — — 24 automobile 328,952 737 Other Residential First trusts equity lines 1 , 357,41 5 9,330,21 7 8,048,732 — — — 1,400,1 25 — — — 367,073 tOtal 138,750,550 8,788,229 7, 158,743 — — — — — — — — — — — — — — — — — — — — A loan modification is classified as a troubled debt restructuring (TDR) if both of the following exist: 1) the borrower is experiencing financial difficulty, and 2) the Bank has granted a concession to the borrower. The assessment of whether the above conditions exist is subjective and requires management’s judgment. TDRs are typically modified through reductions in interest rates, reduction in payments, changing the payment terms or through extensions in term maturity. Freedom Bank oF Virginia • 2012 annual report There were no loans modified as TDRs for the year ended December 31, 2012. An analysis of troubled debt restructurings at December 31, 2011 is as follows: number of contrActs ($) pre-modificAtion outstAnding recorded investment($) post-modificAtion outstAnding recorded investment($) commercial & industrial commercial real estate 2 1 590,963 1,631,300 590,963 1,631,300 The 2011 TDRs are performing as expected post-modification with one of the loans remaining on nonaccrual. The Bank has no additional funds committed to be advanced in connection with the troubled debt restructured 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 condi- tions, 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 $3,028,477 and $3,204,093 at December 31, 2012 and 2011, respectively. New loans made to such related parties, including loans held by new directors, amounted to $425,544 and $3,116,244 and payments amounted to $601,160 and $3,548,807 at December 31, 2012 and 2011, respectively. 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment include the following: 25 Furniture & equipment leasehold improvements Software tOtal cOst less accumulated depreciation 2012 ($) 2011 ($) 1,1 52,437 1 33,489 30 1 ,762 1,084,629 1 30,959 300,562 1,587,688 1 , 5 1 6, 150 (1,388,188) (1,302,293) net bank premises & equipment 199,500 2 1 3, 857 Depreciation and amortization of bank premises and equipment charged to expense amounted to $85,895 and $108,998 in 2012 and 2011, respectfully. Financial StatementS 6. DEPOSITS Time deposits in denominations of $100,000 or more totaled $100,591,201 and $79,879,691 at December 31, 2012 and 2011, respectively. The following are time deposits maturing in years ending December 31: 2013 2014 2015 2016 2017 & thereafter tOtal $94,3 15,858 2 3,040,81 0 2,593,337 1 7,94 1 , 078 1 ,664,406 $139,555,489 The Bank held related party deposits of approximately $5,581,000 and $3,921,000 at December 31, 2012 and 2011, respectively. 26 7. BORROWINGS At December 31, 2012 and 2011, 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, 2012 and 2011. At December 31, 2012 and 2011, the Bank had an additional $2,000,000 available under a line of credit Fed Funds facility to be used for temporary, short-term needs with borrowings not to exceed 30 consecutive calendar days. There were no borrowings on this line at December 31, 2012 and 2011. Freedom Bank oF Virginia • 2012 annual report 8. INCOME TAXES Significant components of deferred income tax assets and liabilities are as follows at December 31: deferred source 2012 ($) 2011 ($) net operating loss carryforward 14,000 490,000 loan loss reserve 1,223,000 1 ,1 5 1,000 unearned loan Fees & costs (net) 98,000 99,000 depreciation (19,000) (17,000) grOss deferred tax assets 1,316,000 1,723,000 Valuation allowance (704,000) ( 1 ,111,000) net deferred tax assets 612,000 612,000 The Bank has net operating losses carried forward of approximately $42,000 at December 31, 2012, which start to expire in 2029. The Bank had a current year net operating loss carryforward benefit of $476,000. 27 The provision for income taxes consists of the following at December 31: current tax expense deferred tax expense 2012 ($) 2011 ($) — — 407,000 645,000 change in Valuation allowance (407,000) (645,000) — — Financial StatementS 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 2012 (%) 2011 (%) 34% — (34) 0% 34% — (34) 0% 9. CAPITAL REQUIREMENTS 28 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 fac- tors. 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, 2012, that the Bank meets all the capital adequacy requirements to which it is subject. As of December 31, 2012, the Bank was categorized as well capitalized under the regulatory framework for prompt correc- tive 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. Freedom Bank oF Virginia • 2012 annual report The Bank’s actual capital amounts and ratios as of December 31, 2012 and 2011 are as follows: ActuAl for cApitAl AdequAcy purposes minimum to be well cApitAlized under prompt corrective Action provisions Amount ($) rAtio (%) Amount ($) rAtio (%) Amount ($) rAtio (%) dec. 31, 2012 total capital (to risk weighted assets) 25,264,09 1 13.95 14,484,880 8.00 18,106,100 10.00 tier 1 capital (to risk weighted assets) 24,978,282 13.80 7,242,440 4.00 10,863,660 6.00 tier 1 capital (to average assets) 24,978,282 1 1.48 8,700,8 1 6 4.00 10,876,080 5.00 dec. 31, 2011 total capital (to risk weighted assets) 23,697,402 14.52 13,058,320 8.00 16,322,900 10.00 29 tier 1 capital (to risk weighted assets) 23,562,626 14.44 6,529,1 60 4.00 9,793,740 6.00 tier 1 capital (to average assets) 23,562,626 12.85 7,335,889 4.00 9,169,8 6 1 5.00 Financial StatementS 10. STOCK OPTION PLAN In 2007, the Bank established the 2007 stock option and equity plan (the Plan) for executives, other employees, officers, directors and consultants. Shares under the Plan may be granted at not less than 100 percent of the fair market value at the grant date. The authorized and granted options under the Plan are as follows: 2007 plan 480,000 374,220 335,250 Authorized grAnted vested The stock options shall not be exercisable more than ten years after the date such option is granted. Shares typically vest over periods ranging from one to four years. At December 31, 2012, there was no unrecognized compensation expense related to non-vested share-based compensation due to materiality. Amounts and the number of options have been retrospectively adjusted for the six-for-five stock split that was effective on February 16, 2012. The Bank canceled and reissued stock options granted in 2007. The following summarizes the option activity under the Stock Option Plan: 30 outstAnding (dec. 31, 2010) Grants exercised canceled or expired outstAnding (dec. 31, 2011) Grants exercised canceled or expired outstAnding (dec. 31, 2012) number of shAres ($) option price per shAre ($) AverAge exercise price ($) 179,280 183,000 — — 362,280 1 10,820 — (98,880) 10.58 8.28 — — 9.42 8.64 — 1 2.2 1 — 8.28 — — 9.42 8.64 — 1 2.2 1 374,220 8.45 8.45 Freedom Bank oF Virginia • 2012 annual report The weighted average fair value of options granted during the year ended December 31, 2012 was $1.19. The weighted average remaining contractual life of options outstanding as of December 31, 2012 is 9.5 years. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Bank uses the Black- Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of 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 ex- pected 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 meet- ings of the Board of Directors as well as subcommittee meetings in the form of Bank stock. For the years ended December 31, 2012 and 2011, the Bank recognized stock-based compensation expense of $34,434 and $138,742, respectively. 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. 31 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. Financial StatementS The following are the future minimum lease payments at December 31, 2012: yeArs ending december 31 2013 2014 2015 2016 tOtal $449,767 464,732 245,755 97,67 1 $1,257,925 Rent expense amounted to $440,405 and $454,993 for the years ended December 31, 2012 and 2011, respectively. 12. FAIR VALUE MEASUREMENTS 32 Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value Measure- ments and Disclosures, provides a framework for measuring fair value. That framework provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value focuses on the price that would be received to sell the asset or paid to transfer the liability regardless of whether an observable liquid market price existed (an exit price). The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under FASB ASC 820 are described below: Level 1 – inputs to the valuation methodology are based upon unadjusted quoted prices for identical assets or liabilities in active markets that the Bank has the ability to access. Level 2 – inputs to the valuation methodology include: quotes prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, and market-corroborated inputs. If the asset or liability has a specified (contractual) term, the Level 2 input must be observable for substantially the full term of the asset or liability. Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3 assets and liabilities measured at fair value are based on one or more of three valuation techniques (market, cost, or income approach). The market approach evaluates prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities. The cost approach evaluates the amount that would be required to replace the service capacity of an asset (i.e. replacement cost). The income approach uses techniques that convert future amounts to a single present amount based on market expectations (including present value techniques, option-pricing models, and lattice models). The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observ- able inputs and minimize the use of unobservable inputs. Freedom Bank oF Virginia • 2012 annual report 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 signifi- cant 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, 2012: quoted prices in Active mArkets for identicAl Assets (level 1) ($) significAnt other observAble inputs (level 2) ($) significAnt unobservAble inputs (level 3) ($) fAir vAlue ($) dec. 31, 2012 available-for-Sale Securities 28,717,795 — 28,717,795 dec. 31, 2011 available-for-Sale Securities 15,183,798 — 15,183,798 — — 33 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. Financial StatementS 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 ($) dec. 31, 2012 impaired loans 3,750,258 — 3,396,6 1 2 353,646 dec. 31, 2011 impaired loans 5,458,743 — 5,072,248 386,495 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. 34 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 and held-to-maturity: 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 instru- ments. 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 terms 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 discount- ed 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, 2012 and 2011, the fair values of loan commitments and standby letters of credit are immaterial. Therefore, they have not been included in the following table. Freedom Bank oF Virginia • 2012 annual report The estimated fair values of the Bank’s financial instruments are as follows at December 31: 2012 2011 cArrying Amount ($) fAir vAlue ($) cArrying Amount ($) fAir vAlue ($) Financial Assets cash & due from Banks 10,884,094 1 0,884,094 16,128,032 1 6,1 28,032 Interest Bearing Deposits with Banks 1 ,0 16,006 1 , 01 6,006 1 ,007,339 1,007,339 Federal Funds Sold 18, 788,000 1 8,788,000 1 5 ,753,000 15 , 753,000 Securities available-for-Sale 28,71 7,795 28 ,71 7,795 1 5 ,183,798 1 5 , 183,798 loans Held for Sale 3,656,829 3,656,829 3,007,500 3,007,500 Securities Held-to-maturity 348,6 1 6 356,652 666,1 5 2 689,358 loans receivable (net) 169,665,025 173,934,547 152,370,029 153,546,443 accrued interest receivable 607,276 607,276 5 1 9,450 51 9,450 Bank-owned life insurance 2,043,1 75 2,043 ,175 — — 35 tOtal financial assets 235,726,81 6 240,004,374 204,635,300 205,834,920 Financial Liabilities non-interest Bearing deposits 34,95 1 , 109 34,95 1 ,109 25,392,303 25,392,303 Interest Bearing Deposits 38,069,144 38,069,144 42,942,835 42,942,835 time deposits 139,555,489 1 3 7,310,039 1 1 4, 8 1 1 , 1 84 1 1 3,941 ,222 accrued interest payable 69,852 69,852 58,642 58,642 tOtal financial liabilities 21 2,645,594 210,400,144 183,204,964 182,335,002 Financial StatementS 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as commit- ments to extend credit and standby letters of credit, which are not included in the accompanying financial statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for instruments that are included in the balance sheets. Financial instruments whose contract amount represents credit risk were approximately as follows: commitments to extend credit 65,749,000 53,814,000 Standby letters of credit 899,000 1, 151 ,000 2012 ($) 2011 ($) 36 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 receiv- able, inventory, property and equipment, and income-producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred any losses on its commitments in either 2012 or 2011. Freedom Bank oF Virginia • 2012 annual report 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, 2012 and 2011, capital was not available for payment of dividends. 15. DEFERRED BENEFITS 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 $75,996 and $77,082 for the years ended December 31, 2012 and 2011, respectively. In December 2012, the Bank adopted a directors’ deferred compensation plan. The plan became effective January 1, 2013. There was no activity for 2012. 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. 37 Financial StatementS SHAREHOLDER & COMPANY INFORMATION Board of direcTors richard c. litman Chairman 38 cynthia carter atwater Corporate Secretary daVid c. karlgaard, ph.d. g. thOmas cOllins, jr. michael a. miranda terry l. cOllins, ph.d. alVin e. nashman, ph.d. h. jasOn gOld jOhn t. rOhrback nOrman p. hOrn craig s. underhill president & Chief Executive officer Freedom Bank oF Virginia • 2012 annual report Freedom Bank oF Virginia • 2012 annual report execuTive officers & senior ManageMenT craig s. underhill president & Chief Executive officer c. keVin curtis Executive Vice president Chief lending officer debOrah a. free Senior Vice president Branch Administration officer karin m. jOhns Executive Vice president Chief Financial officer rObert d. willey, jr. Executive Vice president Commercial Banking jOan e. liszka Senior Vice president, human Resources Assistant Corporate Secretary coMMercial Banking c. keVin curtis Executive Vice president Chief lending officer NMlS# 1040247 james j. curry Senior Vice president james t. nelsOn, iii Senior Vice president michael j. underwOOd Senior Vice president stephen a. witt Senior Vice president Vishal m. gandhi Vice president michael a. marsden Vice president e. rObert musseman, jr. Vice president NMlS# 85152 39 loan adMinisTraTion rObert d. willey, jr. Executive Vice president Senior Credit officer kimberly j. ryman Senior Vice president Senior loan Administration & information officer sally t. siVerOni Vice president portfolio Manager SHareHolder & companY inFormation 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 direcTors eMeriTus With Deepest Appreciation for the Directors Who Previously Served william g. dukas Founding Director 2000-2011 In Memoriam 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 russel e. sherman Founding Director 2000-2007 In Memoriam harry n. snyder, O.d. Founding Director 2000-2007 james f. steffey Founding Director 2000-2007 Director Emeritus c. stephen templetOn Founding Director 2000-2002 charles m. wright Founding Director 2000-2002 Director Emeritus arlene lyles pripetOn daVid c. knapp james f. steffey darren bernstein michael a. magnOtti michael j. sulliVan irVing bernstein dOnald j. mayer c. stephen templetOn william c. bOgart Owen michael mccall thOmas j. tracy lOuis m. cOcks, jr. stephen w. mccarthy stephen m. turner jimmy b. cOntristan usama h. misleh rObert g. williams jOhn r. herbert elizabeth j. mOffett charles m. wright timOthy p. hecht ali r. Oskuie theOdOre a. yiannarakis m. kurka thOmas j. riley 40 Freedom Bank oF Virginia • 2012 annual report MorTgage loan geOrge j. decker Vice president Mortgage loan originator NMlS# 525099 paige a. lutz Mortgage loan originator NMlS# 1052568 william t. rOgers Mortgage loan originator NMlS# 141858 fredric V. wilsOn Mortgage loan originator NMlS# 525100 operaTions karin m. jOhns Executive Vice president Chief Financial officer huMan resources, MarkeTing, & shareholder relaTions jOan e. liszka Senior Vice president, human Resources Assistant Corporate Secretary 41 Branches debOrah a. free Senior Vice president Branch Administration officer paula a. newsOme Vice president NMlS# 993276 karla V. wills Vice president g. VerOnika caVerO Branch operations Manager alfredO g. mOlina Branch Manager fBv capiTal advisors, inc. rObert n. rubin president, Subsidiary SHareHolder & companY inFormation cOrpOrate headquarters 10555 Main Street Fairfax, VA 22030 703-242-5300 independent accOuntants thompson, Greenspon & Co., p.C. Fairfax, VA transfer agent American Stock transfer & trust Company Shareholder Services - Admin 2 team 6201 Fifteenth Avenue Brooklyn, NY 11219 800-937-5449 cOmmOn stOck the common stock trades on the otC Bulletin Board or otCBB under the symbol “FDVA.” annual meeting July 30, 2013- 10:00a.m. the Westwood Country Club 800 Maple Avenue East Vienna, VA 22180 Freedom Bank oF Virginia • 2012 annual report FAIRFAX 10555 Main Street Fairfax, VA 22030 VIENNA 502 Maple Avenue W. Vienna, VA 22180 703.242.5300 www.FreedomBankVA.com

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