ANNUAL REPORT
2013 FINANCIAL RESULTS
FAIRFAX RESTON VIENNA
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 2013.
Freedom Bank had another year of strong financial performance. Assets, loans and checking account balances ended at record highs.
Loan growth for 2013 increased revenues, producing a 15.1% rise in net income to $1,371,773 versus $1,192,253 at December 31, 2012. The
increased bottom line was a direct result of increasing top line revenue with interest and fees on loans of $10,728,017 at December
31, 2013, up $1,422,422 (15.3%) from the prior year. Net interest income increased $1,361,832 (17.2%) to $9,274,128 in 2013. Continued
improvement in asset quality reduced the Bank’s provision for loan losses from $688,200 in 2012 to $297,500 in 2013, which increased
net income after provision $1,752,532 (24.3%) to $8,976,628 at December 31, 2013.
Loan growth increased assets. Loans receivable elevated $48,263,037 (28.1%) to $220,164,884 at December 31, 2013. More loans allowed
the Bank to reduce its holdings of lower yielding assets. Reduced investment securities decreased interest earned on investments, but
total interest income was still up $1,338,099 (13.5%) in 2013 to $11,259,048. Consequently, cash, Fed funds sold and investment securities
all declined in 2013. Overall, assets increased $35,559,915 (14.9%) at December 31, 2013 to $274,202,059, a record high.
Loan growth was funded by rises in all deposit products. Non-interest bearing demand deposits increased $4,134,309 (11.8%) to
$39,085,418. Money market accounts rose $10,768,287 (29.4%) to $47,370,151 and certificates of deposit climbed $17,438,199 (12.5%) to
$156,993,688 at December 31, 2013. Lower interest rates on deposit accounts reduced total interest expense on deposits from $2,008,653
at December 31, 2012 to $1,984,920 December 31, 2013 despite a $34,577,805 increase in deposits in 2013.
Asset quality continued improving in 2013, with a reduction in the percentage of past due loans and non-performing assets, and a net
recovery on charge-offs. Past due loans were 0.01% at December 31, 2013, down from 0.23% the prior year. Non-performing loans as a
percentage of loans decreased from 1.21% at December 31, 2012 to 0.54% at December 2013. Charge offs were $488,542 in 2012 versus a
net recovery of amounts previously written off of $53,041 in 2013.
Much of the increase in revenue for the year was due to the Bank’s investment in additional lending staff. More personnel increased
salaries and benefits $1,130,891 (27.6%) to $5,224,922 in 2013. Coupled with a $126,086 (20.8%) rise in data processing expenses, total
expenses increased 22.8% to $1,576,838. Revenue increases were greater, producing the $179,520 (15.1%) increase in net profit over
December 31, 2012.
Rising mortgage rates cooled off the mortgage business in 2013, resulting in a reduction in income from mortgage originations in the
second half. However, this is a small part of the Bank’s operations and total other income still increased from $875,816 at December 31,
2012 to $879,642 at December 31, 2013.
Stockholder’s equity at December 31, 2013 was $26,118,725, up 3.4% from $25,264,084 at December 31, 2012. Year end book value per
share was $7.53, up 2.4% from $7.35 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, 2013, the ratios for the Bank were 10.5%, 12.1% and 13.3%, respectively, all in the well capitalized category.
The Bank has focused for many years on serving the banking needs of government contractors in the region. At December 31, 2013 the
Bank had thirty-eight clients in this market segment. Five of the clients were added during 2013. Four of our clients are located outside
of Freedom Bank’s geographic market making government contracting our second “community” as a community bank. These accounts
provide a significant portion of the Bank’s operating deposits and floating rate loans, which provide some protection to the Bank if
interest rates were to rise.
In February 2014, the Bank received approval from Financial Industry Regulatory Authority (FINRA) to operate its investment banking
subsidiary, FBV Capital Advisors, Inc. This subsidiary provides merger and acquisitions advisory services to small businesses in the
markets served by the Bank. A majority of its clients are expected to be government contractors. 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 generate fee income from these services.
The Bank signed a lease on November 21, 2013 to open our third banking office at 11700 Plaza America Drive, Reston, Virginia 20190,
which opened for business on June 19, 2014. The Bank located commercial lending officers in the branch to accelerate its growth to
profitability and better serve our customers in western Fairfax.
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 Of the BOard
FINANCIAL HIGHLIGHTS
$240
$220
$200
$180
$160
$140
$120
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$260
$240
$220
$200
$180
$160
$140
$0
TOTAL LOAN GROWTH
$220,164,884
$154,407,193
$171,901,847
2011
2012
Year
2013
TOTAL ASSET GROWTH
$274,202,059
$238,642,144
$207,557,264
2011
2012
Year
2013
)
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$35
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$265
$245
$225
$205
$185
$165
$145
$125
$0
TOTAL DEMAND DEPOSIT GROWTH
(non-interest bearing)
$39,085,418
$34,951,109
$25,392,303
2011
2012
Year
2013
TOTAL DEPOSIT GROWTH
$247,153,547
$212,575,742
$183,146,322
2011
2012
Year
2013
TABLE OF
CONTENTS
Independent Auditors’ Report
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
Shareholder & Company Information
2
3
5
6
6
7
9
30
INDEPENDENT
AUDITORS’
REPORT
To The Board of direcTors & sTockholders
The Freedom Bank of Virginia
Fairfax, Virginia
We have audited the accompanying financial statements of The Freedom Bank of Virginia, which comprise the balance
sheets as of December 31, 2013 and 2012, and the related statements of operations, comprehensive income, changes in
stockholders’ 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 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 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
management, 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, 2013 and 2012, 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
April 28, 2014
Freedom Bank oF Virginia • 2013 annual report FINANCIAL
STATEMENTS
Balance Sheets
YEARS ENDED DECEMBER 31
2013 & 2012
Assets
Cash and Due from Banks
Interest Bearing Deposits 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
Bank-Owned Life Insurance
Other Assets
totAl Assets
3
2013 ($)
2012 ($)
8,171,071
1,020,078
10,884,094
1,016,006
16,817,000
18,788,000
23,740,219
28,717,795
44,679
778,000
768,900
348,616
746,650
3,656,829
220,164,884
171,901,847
(2,587,363)
(2,236,822)
217,577,521
169,665,025
292,377
697,326
996,000
2,101,603
1,197,285
199,500
607,276
612,000
2,043,175
1,357,178
274,202,059
238,642,144
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
stockholders’ equity
Common stock $3.47 par value, 5,000,000 shares authorized:
3,468,149 Shares Issued & Outstanding, 2013;
3,439,340 Shares Issued & Outstanding, 2012
Additional Paid-in Capital
Accumulated Other Comprehensive (loss) Income, net
4
Retained Deficit
tOtaL stOCkhOLders’ equity
2013 ($)
2012 ($)
39,085,418
34,951,109
47,370,151
36,601,864
3,704,290
1,467,280
156,993,688
247,153,547
139,555,489
212,575,742
852,477
77,310
732,466
69,852
248,083,334
213,378,060
12,042,200
11,942,228
16,371,940
16,284,303
(418,932)
285,809
(1,876,483)
26,118,725
(3,248,256)
25,264,084
totAl liAbilities & stockholders’ equity
274,202,059
238,642,144
NoTe: The Notes to Financial Statements are an integral part of these statements.
Freedom Bank oF Virginia • 2013 annual report
Statements of Operations
YEARS ENDED DECEMBER 31
2013 & 2012
interest income
Interest & Fees on Loans
Interest on Investment Securities
Interest on Federal Funds Sold
tOtaL interest inCOme
interest exPense
Interest on Deposits
net interest inCOme
2013 ($)
2012 ($)
10,728,017
9,305,595
498,274
32,757
574,361
40,993
11,259,048
9,920,949
2013 ($)
2012 ($)
1,984,920
9,274,128
2,008,653
7,912,296
Provision for Possible loAn losses
297,500
688,200
net interest inCOme after
Provision for Possible Loan Losses
other income
Service Charges & Other Income
Increase in Cash Surrender Value of
Bank-owned Life Insurance
tOtaL Other inCOme
oPerAting exPenses
8,976,628
7,224,096
821,214
58,428
832,641
43,175
879,642
875,816
5
Officers & Employee Compensation & Benefits
5,224,922
4,094,031
Occupancy Expense
Equipment & Depreciation Expense
Insurance Expense
Professional Fees
Data & Item Processing
Business Development
Franchise Taxes
Other Operating Expenses
tOtaL OPerating exPenses
Income Before Income Taxes
income tAx exPense
net income
net income Per common shAre
net income Per diluted shAre
533,771
240,302
213,319
636,913
733,474
163,386
248,180
490,230
510,776
188,442
179,105
548,748
607,388
123,455
226,110
429,604
8,484,497
1,371,773
6,907,659
1,192,253
—
—
1,371,773
1,192,253
0.40
0.40
0.35
0.35
NoTe: The Notes to Financial Statements are an integral part of these statements.
Financial StatementS Statements of Comprehensive Income
YEARS ENDED DECEMBER 31
2013 & 2012
Net Income
Other Comprehensive (Loss) Income:
Unrealized holding (loss) gain arising during the year,
net of tax benefit of $379,475 in 2013 and net of tax expense
of $81,326 in 2012
comPrehensive income
2013 ($)
2012 ($)
1,371,773
1,192,253
(704,741)
151,033
667,032
1,343,286
Statements of Changes
in Stockholders’ Equity
YEARS ENDED DECEMBER 31
2013 & 2012
6
shAres of
common
stock
common
stock
($)
AdditionAl
PAid-in
cAPitAl ($)
AccumulAted
other
comPrehensive
income ($)
retAined
eArnings ($)
(deficit)
totAl
stockholders’
equity ($)
*2,363,665
11,818,325
16,184,810
134,776
(4,440,509)
23,697,402
—
—
472,739
—
—
—
—
—
—
29,713
123,903
—
—
65,059
34,434
—
1,192,253
1,192,253
151,033
—
—
—
—
—
—
—
151,033
—
188,962
34,434
*2,866,117
11,942,228
16,284,303
285,809
(3,248,256)
25,264,084
—
—
573,232
28,800
—
—
—
—
—
—
99,972
87,637
3,468,149
12,042,200
16,371,940
—
1,371,773
1,371,773
(704,741)
—
—
—
(704,741)
—
—
(418,932)
—
(1,876,483)
187,609
26,118,725
bAlAnce
(dec. 31, 2011)
Net Income
Other Comprehensive Income
Six-for-five Stock Split
Issuance of Common Stock
Stock-based Compensation
bAlAnce
(dec. 31, 2012)
Net Income
Other Comprehensive Loss
Six-for-five Stock Split
Issuance of Common Stock
bAlAnce
(dec. 31, 2013)
*Shares of common stock retroactively adjusted for the six-for-five stock split is 3,439,340 and 2,836,404 as of
December 31, 2012 and 2011, respectively.
NoTe: The Notes to Financial Statements are an integral part of these statements.
Freedom Bank oF Virginia • 2013 annual report Statements of Cash Flows
YEARS ENDED DECEMBER 31
2013 & 2012
cAsh flows from oPerAting Activities
2013 ($)
2012 ($)
Net income
Non-cash items included in Net income
Depreciation & Amortization
Provision for Possible Loan Losses
Net Amortization of Available-for-Sale Securities
Loss (Gain) on Sale of Available-for-Sale Securities
Stock-based Compensation Expense
Deferred Income Tax
Increase in Cash Surrender Value of Bank-Owned Life Insurance
(increase) decrease in
Loans Held for Sale
Accrued Interest Receivable
Other Assets
increase (decrease) in
Other Accrued Expenses
Accrued Interest Payable
1,371,773
1,192,253
91,530
297,500
481,794
19,554
—
(384,000)
(58,428)
2,887,929
(90,050)
385,472
273,908
7,458
85,895
688,200
422,375
(7,872)
34,434
—
(43,175)
(649,329)
(87,826)
49,579
(3,758)
11,210
Net Cash Provided by oPeratiNg aCtivities
5,284,440
1,691,986
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 & Paydowns of Securities Available-for-Sale
Proceeds from Sales of Securities Available-for-Sale
Purchase of Bank-Owned Life Insurance
Paydowns of Held-to-Maturity Securities
Purchase of Federal Reserve Bank Stock
Acquisition of Bank Equipment
net Cash used By inVesting aCtiVities
1,971,000
(3,035,000)
(4,072)
(8,667)
(48,209,996)
(17,983,196)
(7,564,873)
(26,186,281)
8,611,051
2,345,833
10,330,573
2,139,567
—
(2,000,000)
303,937
(31,350)
317,536
(57,300)
(184,407)
(42,762,877)
(71,538)
(36,554,306)
NoTe: The Notes to Financial Statements are an integral part of these statements.
7
Financial StatementS cAsh flows from finAncing Activities
2013 ($)
2012 ($)
Increase in Deposits, net
Common Stock Issuance
net Cash PrOVided By finanCing aCtiVities
34,577,805
29,429,420
187,609
34,765,414
188,962
29,618,382
net decreAse in cAsh & due from bAnks
(2,713,023)
(5,243,938)
cAsh & due from bAnks
(beginning of yeAr)
cAsh & due from bAnks
(end of yeAr)
noncAsh investing Activity
unreaLized (LOss) gain On seCurities
aVaiLaBLe-fOr-saLe, net
suPPlementAl informAtion
10,884,094
16,128,032
8,171,071
10,884,094
(704,741)
151,033
Cash Paid during the year fOr interest
Cash Paid during the year fOr inCOme taxes
1,977,462
469,000
1,997,443
160,000
8
NoTe: The Notes to Financial Statements are an integral part of these statements.
Freedom Bank oF Virginia • 2013 annual report Notes to Financial Statements
DECEMBER 31, 2013 AND 2012
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 Fairfax, Reston and Vienna, 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.
9
iNterest BeariNg 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
available-for-sale are carried at fair value with unrealized gains and losses reported in other comprehensive income.
Realized gains (losses) on securities available-for-sale are included in other income (expense) and, when applicable, are
reported as a reclassification adjustment, net of tax, in other comprehensive income.
The amortization of premiums and accretion of discounts are recognized in interest income using methods
approximating the interest method over the period to maturity. Declines in the fair value of individual held-to-maturity
and available-for-sale securities below their cost that are deemed to be other than temporary result in write-downs of the
individual securities to their fair value. The related write-downs are included in earnings as realized losses. Gains and
losses on sales of securities are recorded on the trade date and are determined using the specific-identification method.
Federal Reserve stock is considered a restricted investment security, is carried at cost and 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 statements. Income from loans sold was $445,935 and $564,431 for the years ended December 31, 2013
and 2012, 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
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.
10
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.
BaNk premises aND equipmeNt
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 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.
Freedom Bank oF Virginia • 2013 annual report 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, 2013 and 2012.
other assets
Included in other assets is approximately $42,000 and $604,000 as of December 31, 2013 and 2012, respectively, of prepaid
expense related to the required prepayment of the FDIC premium through the fourth quarter of 2013.
BaNk-owNeD Life iNsuraNce
The Bank entered into bank-owned single premium life insurance policies during 2012 that are maintained by two
counter-parties. 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 income. The Bank monitors the financial strength and condition of both counter parties.
stockhoLDers’ equity
At December 31, 2013, warrants were outstanding and exercisable to purchase 334,208 shares of common stock at $9.20
per share if exercised by January 15, 2015, and 64,655 shares of common stock at $9.20 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 and August 13, 2013.
11
On July 22, 2013, the Bank declared a six-for-five stock split, effective for stockholders of record on August 13, 2013. On
February 22, 2012, the Bank declared a six-for-five stock split, effective for stockholders of record on February 16, 2012. All
references to share and per share amounts in the financial statements have been restated to reflect the stock splits.
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 the difference between the basis of the 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 allowance for loan loss 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 2012, 2011 and 2010 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
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.
statemeNts of cash fLows
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.
12
off-BaLaNce sheet c reDit reLateD fiNaNciaL iNstrumeNts
In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments
under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments
are recorded when they are funded.
suBsequeNt eveNts
The date to which events occurring after December 31, 2013, the date of the most recent balance sheet, have been
evaluated for possible adjustment to the financial statements or disclosure is April 28, 2014, 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, 2013 and 2012 was $727,000 and $1,024,000, respectively.
Freedom Bank oF Virginia • 2013 annual report 3. Securities Available-for-Sale & Held-to-Maturity
The amortized cost and fair values of securities as shown in the balance sheets of the Bank are as follows:
dec. 31, 2013
available-for-sale
U.S. Gov’t & Agency Securities
Corporate Securities
Mortgage Backed Securities
Municipal Securities
SBA Loan Pools
ToTal avaIlaBle-for-sale
held-to-Maturity
Mortgage Backed Securities
totAl investment securities
dec. 31, 2012
available-for-sale
U.S. Gov’t & Agency Securities
Corporate Securities
Mortgage-backed Securities
Municipal Securities
SBA Loan Pools
ToTal avaIlaBle-for-sale
held-to-Maturity
Mortgage-backed Securities
totAl investment securities
Amortized
costs ($)
gross
unreAlized
gAins ($)
gross
unreAlized
losses ($)
fAir
vAlue ($)
5,498,891
2,024,844
10,196,736
529,176
6,135,083
24,384,730
44,679
24,429,409
2,500,000
1,758,685
19,227,770
534,478
4,257,155
28,278,088
348,616
28,626,704
496
41,361
50,840
239
—
92,936
868
93,804
24,233
71,016
295,915
15,962
71,715
478,841
8,036
486,877
(188,447)
5,310,940
(23,202)
2,043,003
(246,124)
10,001,452
—
529,415
(279,674)
(737,447)
5,855,409
23,740,219
—
45,547
(737,447)
23,785,766
—
—
2,524,233
1,829,701
(39,134)
19,484,551
—
—
(39,134)
550,440
4,328,870
28,717,795
—
356,652
(39,134)
29,074,447
13
Financial StatementS The amortized cost and estimated fair value of debt securities at December 31, 2013, by contractual maturity, are
as follows:
amounts Maturing in:
1 Year or Less
After 1 Year - 5 Years
After 5 Years - 10 Years
After 10 Years
Mortgage Backed Securities
available-for-sale
held-to-maturity
Amortized
cost ($)
fAir vAlue ($)
Amortized
cost ($)
fAir vAlue ($)
—
—
3,524,844
4,528,067
6,135,083
14,187,994
10,196,736
24,384,730
3,543,500
4,339,859
5,855,408
13,738,767
10,001,452
23,740,219
—
—
—
—
—
—
—
—
—
—
44,679
44,679
45,547
45,547
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.
14
At December 31, 2013 and 2012, U.S. Government and agency securities and mortgage backed securities with a carrying
value of $14,009,759 and $19,804,687, respectively, were pledged to secure public deposits and for other purposes required
or permitted by law.
Information pertaining to securities with gross unrealized losses at December 31, 2013, aggregated by investment
category and length of time that individual securities have been in a continuous loss position, is as follows:
available-for-sale
Corporate Securities
Mortgage Backed Securities
US Treasury obligations
SBA loan pools
held-to-Maturity
Mortgage Backed Securities
less thaN 12 moNths
over 12 moNths
gross
unreAlized
losses ($)
fAir vAlue ($)
gross
unreAlized
losses ($)
fAir vAlue ($)
23,202
227,560
188,447
279,674
1,066,298
6,807,964
3,810,444
5,855,408
—
—
—
18,564
—
460,206
—
—
—
—
—
—
Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently
when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer,
and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for
any anticipated recovery in fair value.
Freedom Bank oF Virginia • 2013 annual report At December 31, 2013, twenty-four debt securities with an unrealized loss for less than one year and two debt securities
with an unrealized loss for greater than one year depreciated less than four percent from the Bank amortized cost basis.
Twenty-four of the securities are secured by Federal agency mortgage backed securities or U.S. Treasury obligations
and direct obligations of U.S. Government agencies. Two of the securities are corporate bonds. These unrealized losses
relate principally to current interest rates for similar types of securities. In analyzing an issuer’s financial condition,
management considers whether the securities are issued by the Federal government or its agencies, whether downgrades
by bond rating agencies have occurred, and the results of reviews of the issuer’s financial condition. As management
has the ability to hold debt securities until maturity, or for the foreseeable future if classified as available-for-sale,
management feels that the unrealized losses on the securities are not deemed to be other-than-temporary.
4. Loans Receivable
Loans receivable include the following:
Commercial
Consumer & Other
Real Estate
suBtOtaL
Deferred Loan Fees
totAls
2013 ($)
2012 ($)
49,599,356
37,615,013
8,182,910
5,395,105
162,801,191
220,583,457
129,180,162
172,190,280
(418,573)
(288,433)
220,164,884
171,901,847
15
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.
Financial StatementS 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:
year 2013
commerciAl
& industriAl
($)
reAl estAte
commerciAl
($)
reAl estAte
construction
($)
reAl estAte
residentiAl
($)
consumer
($)
unAllocAted
($)
totAl ($)
allowance for Possible loan losses
Beginning Balance
380,032
1,221,293
316,118
270,641
48,738
Charge-offs
Recoveries
Provision
—
—
—
—
69,570
61,693
—
105,000
59,724
(42,215)
—
47,499
ending bAlAnce
449,602
1,282,986
480,842
275,925
(9,744)
—
59,014
98,008
Individually Evaluated
for Impairment
Collectively Evaluated
for Impairment
loans receivable
100,923
185,672
—
—
31,346
348,679
1,097,314
480,842
275,925
66,662
—
—
—
—
—
—
2,236,822
(51,959)
105,000
297,500
2,587,363
317,941
2,269,422
ending bAlAnce
49,599,356
101,628,392
17,528,755
43,644,044
8,182,910
— 220,583,457
Individually Evaluated
for Impairment
Collectively Evaluated
for Impairment
16
471,163
1,631,300
693,529
—
31,346
49,128,193
99,997,092
16,835,226
43,644,044
8,151,564
—
2,827,338
— 217,756,119
year 2012
allowance for Possible loan losses
Beginning Balance
274,352
1,176,135
258,405
300,190
13,879
14,203
Charge-offs
Recoveries
Provision
—
—
(488,542)
—
—
—
—
—
105,680
533,700
57,713
(29,549)
ending bAlAnce
380,032
1,221,293
316,118
270,641
—
—
34,859
48,738
Individually Evaluated
for Impairment
Collectively Evaluated
for Impairment
loans receivable
100,923
185,672
—
65,239
1,812
279,109
1,035,621
316,118
205,402
46,926
—
—
(14,203)
—
—
—
2,037,164
(488,542)
—
688,200
2,236,822
353,646
1,883,176
ending bAlAnce
37,615,013
92,966,709
10,386,789
25,826,664
5,395,105
Individually Evaluated
for Impairment
Collectively Evaluated
for Impairment
489,783
1,631,300
1,231,029
391,964
6,182
37,125,230
91,335,409
9,155,760
25,434,700
5,388,923
— 172,190,280
—
3,750,258
— 168,440,022
Freedom Bank oF Virginia • 2013 annual report An analysis of non-accrual and past due loans is as follows at December 31:
year 2013
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
year 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
30-59 dAys
PAst due
($)
60-89 dAys
PAst due
($)
90 dAys or
more PAst
due ($)
totAl
PAst due
($)
current
($)
totAl
finAncing
receivAbles
($)
nonAccruAl
loAns ($)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 49,599,356
49,599,356
471,163
— 41,969,695
41,969,695
— 59,658,697
59,658,697
—
—
— 15,730,226
15,730,226
693,529
—
1,798,529
1,798,529
—
—
—
—
—
—
—
—
135,100
135,100
28,926
28,926
8,018,884
8,047,810
—
—
— 32,321,997
32,321,997
— 11,322,047
11,322,047
2,420
28,926
—
—
28,926
28,926
220,554,531
220,583,457
1,196,038
17
—
—
—
—
—
— 37,615,013
37,615,013
489,783
— 35,690,444
35,690,444
— 57,276,265
57,276,265
—
—
—
—
9,273,622
9,273,622
1,231,029
1,113,167
1,113,167
—
6,182
6,182
272,759
278,941
6,182
—
—
—
5,116,164
5,116,164
— 17,533,926
17,533,926
—
—
391,964
391,964
7,900,774
8,292,738
391,964
398,146
398,146
171,792,134
172,190,280
2,118,958
Financial StatementS An analysis of impaired loans based on loan segment is as follows at December 31:
recorded
investment
($)
unPAid
PrinciPAl
bAlAnce ($)
relAted
AllowAnce
for loAn
losses ($)
AverAge
recorded
investment
($)
interest
income
recognized
($)
693,529
693,529
—
1,017,775
year 2013
With No related allowance recorded
construction
Residential
With an allowance recorded
commercial Non-real estate
Commercial and Industrial
471,163
471,163
100,923
480,365
commercial real estate
Non-Owner Occupied
consumer
totAl
1,631,300
1,631,300
31,346
31,346
COmmerCiaL nOn-reaL estate
residentiaL COnstruCtiOn
COmmerCiaL reaL estate
COnsumer
471,163
693,529
471,163
693,529
1,631,300
1,631,300
31,346
31,346
185,672
31,346
100,923
—
185,672
31,346
1,631,300
34,381
480,365
1,017,775
1,631,300
34,381
18
year 2012
With No related allowance recorded
construction
Residential
With an allowance recorded
commercial Non-real estate
1,231,029
1,231,029
—
1,388,575
Commercial and Industrial
489,783
489,783
100,923
497,204
commercial real estate
Non-Owner Occupied
consumer
totAl
1,631,300
1,631,300
398,146
398,146
COmmerCiaL nOn-reaL estate
residentiaL COnstruCtiOn
COmmerCiaL reaL estate
COnsumer
489,783
1,231,029
1,631,300
398,146
489,783
1,231,029
1,631,300
398,146
185,672
67,051
100,923
—
185,672
67,051
1,631,300
414,028
497,204
1,388,575
1,631,300
414,028
—
—
82,698
1,696
—
—
82,698
1,696
—
—
82,924
2,069
—
—
82,924
2,069
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.
Freedom Bank oF Virginia • 2013 annual report 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.
An analysis of the credit quality indicators is as follows at December 31:
PAss ($)
sPeciAl
mention ($)
substAndArd
($)
doubtful
($)
loss ($)
year 2013
commercial Non-real estate
Commercial and Industrial
48,824,848
303,345
471,163
commercial real estate
Owner Occupied
Non-Owner Occupied
construction
Residential
Commercial
consumer Non-real estate
Automobile
Other
residential
First Trusts
Equity Lines
totAl
year 2012
commercial Non-real estate
37,739,935
54,761,163
3,552,783
3,266,234
676,977
1,631,300
15,036,698
1,798,528
132,680
8,018,884
—
—
—
—
32,198,604
10,484,005
123,393
838,042
693,529
—
2,420
28,926
—
—
208,995,345
8,083,797
3,504,315
Commercial and Industrial
35,818,776
1,306,454
489,783
commercial real estate
Owner Occupied
Non-Owner Occupied
construction
Residential
Commercial
consumer Non-real estate
Automobile
Other
residential
First Trusts
Equity Lines
totAl
31,000,674
48,590,585
4,689,769
5,079,381
—
3,606,300
8,042,593
1,113,167
272,759
5,116,164
17,533,927
—
—
—
—
—
1,231,029
—
6,182
—
—
7,799,592
101,180
391,965
155,288,237
11,176,784
5,725,259
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
19
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Financial StatementS 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.
There were no loans modified as TDRs for the years ended December 31, 2013 and 2012.
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 $3,145,213 and $3,028,477
at December 31, 2013 and 2012, respectively. New loans made to such related parties, including loans held by new
directors, amounted to $531,351 and $425,544, and payments amounted to $414,615 and $601,160 at December 31, 2013
and 2012, respectively.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment include the following:
Furniture & Equipment
Leasehold Improvements
Software
tOtaL COst
20
Less Accumulated Depreciation
net bAnk Premises & equiPment
2013 ($)
2012 ($)
1,056,741
1,152,437
133,489
207,061
133,489
301,762
1,397,291
1,587,688
(1,104,914)
(1,388,188)
292,377
199,500
Depreciation and amortization of bank premises and equipment charged to expense amounted to $91,530 and $85,895 in
2013 and 2012, respectively.
6. DEPOSITS
Time deposits in denominations of $100,000 or more totaled $115,552,642 and $100,591,201 at December 31, 2013
and 2012, respectively.
The following are time deposits maturing in years ending December 31:
2014
2015
2016
2017
2018 & Thereafter
totAl
$83,811,905
34,514,170
18,368,775
2,169,454
18,129,384
$156,993,688
The Bank held related party deposits of approximately $8,156,000 and $5,581,000 at December 31, 2013 and
2012, respectively.
Freedom Bank oF Virginia • 2013 annual report 7. BORROWINGS
At December 31, 2013 and 2012, the Bank had $2,100,000 available under a line of credit Fed Funds facility to be used for
temporary, short-term needs with borrowings not to exceed seven consecutive business days. There were no borrowings
on this line at December 31, 2013 and 2012.
At December 31, 2013 and 2012, 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, 2013 and 2012.
At December 31, 2013, the Bank also had $6,000,000 available under a line of credit Fed Funds facility to be used for
overnight cash settlements. The borrowings are secured by $300,000 held in a cash and correspondent account that is
recorded as cash and due from banks on the balance sheet. There were no borrowings on this line at December 31, 2013.
8. INCOME TAXES
Significant components of deferred income tax assets and liabilities are as follows at December 31:
deferred source
Net Operating Loss Carryforward
Loans & Loan Loss Reserve
Unearned Loan Fees & Costs, net
Depreciation
Gross deferred tax assets
Valuation Allowance
net deferred tAx Assets
2013 ($)
2012 ($)
—
14,000
1,159,000
1,223,000
144,000
(62,000)
98,000
(19,000)
1,241,000
1,316,000
21
(245,000)
996,000
(704,000)
612,000
The Bank had a current year net operating loss carryforward benefit of $49,000 and has no losses that carry forward.
The provision for income taxes consists of the following at December 31:
Current Tax Expense
Deferred Tax Expense
Change in Valuation Allowance
2013 ($)
2012 ($)
384,000
75,000
(459,000)
—
—
407,000
(407,000)
—
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
2013 (%)
2012 (%)
34%
—
(34)
0%
34%
—
(34)
0%
Financial StatementS 9. CAPITAL REQUIREMENTS
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, 2013, that the Bank meets all
the capital adequacy requirements to which it is subject.
As of December 31, 2013, 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.
The Bank’s actual capital amounts and ratios as of December 31, 2013 and 2012 are as follows:
22
dec. 31, 2013
Total Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Average Assets)
dec. 31, 2012
Total Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Average Assets)
ActuAl
for cAPitAl
AdequAcy PurPoses
minimum to be well
cAPitAlized under
PromPt corrective
Action Provisions
Amount ($)
rAtio (%)
Amount ($)
rAtio (%)
Amount ($)
rAtio (%)
26,118,725
11.91
17,540,800
8.00
21,926,000
10.00
26,477,656
12.08
8,770,400
4.00
13,155,600
26,477,656
10.48
10,102,931
4.00
12,628,664
6.00
5.00
25,264,091
13.95
14,484,880
8.00
18,106,100
10.00
24,978,282
13.80
7,242,440
4.00
10,863,660
24,978,282
11.48
8,700,816
4.00
10,876,020
6.00
5.00
Freedom Bank oF Virginia • 2013 annual report 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
Authorized
grAnted
vested
576,000
416,911
383,904
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, 2013, 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 splits that were effective
on February 16, 2012 and August 13, 2013. The Bank canceled and reissued stock options granted in 2007.
The following summarizes the option activity under the Plan:
outstAnding
(dec. 31, 2011)
Grants
Exercised
Canceled or Expired
outstAnding
(dec. 31, 2012)
Grants
Exercised
Canceled or Expired
outstAnding
(dec. 31, 2013)
number of
shAres
oPtion Price
Per shAre ($)
weighted
AverAge
exercise Price ($)
434,736
132,992
—
(118,656)
449,072
—
(28,800)
(3,361)
7.81
7.20
—
10.17
7.01
—
6.51
7.05
23
7.81
7.20
—
10.17
7.01
—
6.51
7.05
416,911
7.15
7.15
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, 2013 is 7.7 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.
Financial StatementS 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 committee meetings in the form of Bank stock.
For the year ended December 31, 2012, the Bank recognized stock-based compensation expense of $34,434. No stock-based
compensation expense was recognized for the year ended December 31,2013.
11. OPERATING LEASES
In December 2010, the Bank exercised its second five-year option for the branch facility located at 502 Maple Avenue
in Vienna, Virginia. The agreement provides for a term of five years ending December 2015. The total base annual
lease payments for the second year of the extension are $66,774, increasing a maximum of five percent per annum
thereafter. The lease agreement includes approximately 1,862 square feet on the ground floor for the branch facility.
The lease agreement includes additional rent payments based on a pro rata portion of annual taxes and common area
maintenance charges.
In 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.
24
In October 2004, the Bank entered into a lease for its headquarters and an additional branch facility at 10555 Main
Street in Fairfax, Virginia. The agreement provides for an initial lease term of ten years commencing January 1, 2005 and
ending December 31, 2014. Total base annual lease payments are $168,056 for the first year, increasing a maximum of
three percent per annum thereafter. The lease agreement is for 6,002 square feet. The agreement includes additional rent
payments based on a pro rata portion of annual taxes, common area maintenance charges, and utilities.
In November 2013, the Bank entered into a lease for an additional branch facility at 11700 Plaza America Drive in Reston,
Virginia. The agreement provides for an initial lease term of 10 years commencing May 1, 2014 and ending April 30, 2024
with the option to extend the term for two additional periods of five years each. Total base annual lease payments are
$80,576 for the first year, increasing 1.0275 percent per annum thereafter. The lease agreement is for 2,518 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, 2013:
yeArs ending december 31
2014
2015
2016
2017
2018
Thereafter
$518,450
326,883
179,632
82,804
83,655
460,791
$1,652,215
Rent expense amounted to $460,684 and $440,405 for the years ended December 31, 2013 and 2012, respectively.
Freedom Bank oF Virginia • 2013 annual report 12. FAIR VALUE MEASUREMENTS
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 820, Fair Value
Measurements 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: quoted 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
observable inputs and minimize the use of unobservable inputs.
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:
25
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:
dec. 31, 2013
Available-for-Sale Securities
dec. 31, 2012
Available-for-Sale Securities
fAir vAlue ($) quoted Prices
in Active
mArkets for
identicAl
Assets
(level 1) ($)
significAnt
other
observAble
inPuts
(level 2) ($)
significAnt
unobservAble
inPuts
(level 3) ($)
23,740,219
28,717,795
—
—
23,740,219
28,717,795
—
—
Financial StatementS 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
possible 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:
26
dec. 31, 2013
Impaired Loans
dec. 31, 2012
Impaired Loans
fAir vAlue ($) quoted Prices
in Active
mArkets for
identicAl
Assets
(level 1) ($)
significAnt
other
observAble
inPuts
(level 2) ($)
significAnt
unobservAble
inPuts
(level 3) ($)
2,827,338
3,750,258
—
—
2,509,397
317,941
3,396,612
353,646
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 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 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.
Freedom Bank oF Virginia • 2013 annual report 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 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, 2013 and 2012, the fair values of loan
commitments and standby letters of credit are immaterial. Therefore, they have not been included in the
following table.
The estimated fair values of the Bank’s financial instruments are as follows at December 31:
financial assets
Cash and Due from Banks
Interest Bearing Deposits with Banks
Federal Funds Sold
Securities Available-for-Sale
Loans Held for Sale
Securities Held-to-Maturity
Loans Receivable, net
Accrued Interest Receivable
Bank-owned Life Insurance
2013
2012
cArrying
Amount ($)
fAir vAlue ($)
cArrying
Amount ($)
fAir vAlue ($)
8,171,071
1,020,078
8,171,071
10,884,094
10,884,094
1,020,078
1,016,006
1,016,006
16,817,000
16,817,000
18,788,000
18,788,000
23,740,219
23,740,219
28,717,795
28,717,795
768,900
44,679
768,900
45,547
3,656,829
3,656,829
348,616
356,652
217,577,521
217,816,123
169,665,025
173,934,547
697,326
697,326
607,276
607,276
2,101,603
2,101,603
2,043,175
2,043,175
27
totAl finAnciAl Assets
270,938,397
271,177,867
235,726,816
240,004,374
financial liabilities
Non-interest Bearing Deposits
Interest Bearing Deposits
Time Deposits
Accrued Interest Payable
39,085,418
39,085,418
34,951,109
34,951,109
47,370,151
47,370,151
36,601,864
36,601,864
156,993,688
155,359,016
139,555,489
137,310,039
77,310
77,310
69,852
69,852
totAl finAnciAl liAbilities
243,526,567
241,891,895
211,178,314
208,932,864
Financial StatementS 13. FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
In the normal course of business, the Bank has outstanding commitments and contingent liabilities, such as
commitments to extend credit and standby letters of credit, which are not included in the accompanying financial
statements. The Bank’s exposure to credit loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit and standby letters of credit is represented by the contractual or notional
amount of those instruments. The Bank uses the same credit policies in making such commitments as it does for
instruments that are included in the balance sheets.
Financial instruments whose contract amount represents credit risk were approximately as follows:
Commitments to Extend Credit
Standby Letters of Credit
2013 ($)
2012 ($)
89,741,000
65,749,000
757,000
899,000
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.
28
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 2013 or 2012.
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, 2013 and 2012, capital was not available for payment of dividends.
Freedom Bank oF Virginia • 2013 annual report 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
$110,400 and $75,996 for the years ended December 31, 2013 and 2012, respectively.
The Bank adopted deferred compensation plans for its directors, effective December 31, 2012, and its executives, effective
February 1, 2013. Under the directors’ plan, a director may elect to defer all or portion of any director-related fees,
including fees for serving on board committees. Under the executives’ plan, certain employees may defer all or a portion
of their compensation, including any bonus compensation.
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 20, 2014, the Bank declared an eleven-for-ten stock split. The stock split will be effective for stockholders of
record on April 1, 2014.
29
Financial StatementS SHAREHOLDER &
COMPANY
INFORMATION
Board of direcTors
riChard C. Litman
Chairman
30
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
Vice Chairman
nOrman P. hOrn
Craig s. underhiLL
President and
Chief Executive Officer
Freedom Bank oF Virginia • 2013 annual report 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
In Memoriam
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
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
31
SHAREHOLDER & COMPANY INFORMATION
advisory Board
azmat aLi
eLizaBeth j. mOffett
darren Bernstein
james n. newsOme
wiLLiam C. BOgart
aLi r. Oskuie
LOuis m. COCks, jr.
arLene LyLes PriPetOn
jimmy B. COntristan
thOmas j. riLey
PhiLLiP dOndes
james f. steffey
jOhn r. herBert
miChaeL j. suLLiVan
timOthy P. heCht
frank V. sturgeOn
daVid C. knaPP
C. stePhen temPLetOn
32
miChaeL a. magnOtti
thOmas j. traCy
stePhen masCiOLa
stePhen m. turner
dOnaLd j. mayer
rOBert g. wiLLiams
Owen miChaeL mCCaLL
CharLes m. wright
stePhen w. mCCarthy
theOdOre a. yiannarakis
usama h. misLeh
Freedom Bank oF Virginia • 2013 annual report execuTive officers
& seNior leadershP TeaM
Craig s. underhiLL
President and
Chief Executive Officer
C. keVin Curtis
Executive Vice President
wChief Lending Officer
jOan e. Liszka
Senior Vice President, Human Resources
Assistant Corporate Secretary
karin m. jOhns
Executive Vice President
Chief Financial Officer
rOBert d. wiLLey, jr.
Executive Vice President
Commercial Banking
deBOrah a. free
Senior Vice President
Branch Administration Officer
coMMercial BaNkiNG
C. keVin Curtis
Executive Vice President
Chief Lending Officer
NMLS# 1040247
james j. Curry
Senior Vice President and
Team Leader
james t. neLsOn, iii
Senior Vice President
Laura L. POweLL
Senior Vice President
miChaeL j. underwOOd
Senior Vice President and
Team Leader
stePhen a. witt
Senior Vice President
VishaL m. gandhi
Vice President
danieL e. marks
Vice President
e. rOBert musseman, jr.
Vice President
NMLS# 85152
riChard m. sOBOnya
Vice President
hermann wendOrff
Vice President
33
SHAREHOLDER & COMPANY INFORMATION loaN adMiNisTraTioN
rOBert d. wiLLey, jr.
Executive Vice President
Senior Credit Officer
kimBerLy j. ryman
Senior Vice President
Senior Loan Administration and
Information Officer
saLLy t. siVerOni
Senior Vice President
Chief Credit Officer
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
BraNches
g. VerOnika CaVerO
fairfax
Branch Manager
PauLa a. newsOme
Vienna
Vice President/Brach Manager
NMLS# 993276
aLfredO g. mOLina
reston
Branch Manager
34
fBv caPiTal advisors, iNc.
rOBert n. ruBin
President
Freedom Bank oF Virginia • 2013 annual report COrPOrate headquarters
THE FREEDOM BANk OF VIRGINIA
10555 Main Street
Fairfax, VA 22030
703-242-5300
indePendent aCCOuntants
Thompson Greenspon
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 FREEDOM BANk OF VIRGINIA
Common stock is traded on the
OTC Markets Group (OTCQB)
under the symbol FDVA
nOtiCe Of annuaL meeting
The Annual Meeting of Shareholders
will be held on
Tuesday, August 19, 2014 - 10:00 a.m.
at the Westwood Country Club
800 Maple Avenue East
Vienna, VA 22180
35
SHAREHOLDER & COMPANY INFORMATION IN MEMORY
MICHAEL A. MIRANDA
CO-fOunder and Organizing direCtOr
THE FREEDOM BANk OF VIRGINIA
Mike will always remain in our hearts
and memories.
fairfax
10555 Main Street
Fairfax, VA 22030
restOn
11700 Plaza America Drive
Reston, VA 22190
Vienna
502 Maple Avenue W.
Vienna, VA 22180
703.242.5300
www.freedomBankVa.com