Freedom Bank of Virginia
Annual Report 2016

Plain-text annual report

6 1 0 2 T R O P E R L A U N N A TESTIMONIALS DR. SHAHROKH SOLTANI, DMD Owner, My Face My Smile “The care and attention I receive from Jim Nelson and Freedom Bank is excellent. The Bank’s great personal service has exceeded my expectations. I am continually impressed by their commitment to helping me succeed. When I was looking for a business loan for my new dental practice location, Freedom Bank not only tailored a loan package to my needs, but also gave me the kind of 1-on-1 attention and responsiveness that are so crucial for a small business, not to mention that they knew and understood the special issues unique to running a dental practice. I would absolutely recommend Freedom Bank’s business services to my professional colleagues in the dental field or, for that matter, anyone with small business banking needs.” STEFANIE REISER Founder & Principal, Align Development “Freedom Bank has been fundamental to the growth and success of my business over the past several years. The personal relationship and support I received from Rich Sobonya has allowed me to grow faster, and take on larger projects. I would recommend Freedom Bank to anyone looking for a lender who is willing to roll up their sleeves and get in the trenches with them. Rich has become a fundamental partner in this respect, and a critical member of my team.” RUSTY CORAM Senior Pastor, New Hope Church “We are not only customers of Freedom Bank, but huge fans! Kevin Curtis and his team have always treated us like valued partners and not merely customers. When we have needed capital, Freedom has worked with us to evaluate multiple options and help us come to a mutually beneficial outcome. Our relationship goes beyond banking. Recently, Freedom has supported an international food relief project that we hosted. Freedom not only participated as a sponsor, but 30 of their staff came and volunteered as we packed and shipped over a half million meals to Haiti in the wake of Hurricane Matthew’s devastation. We are enthusiastic in telling people how much we love working with our friends at Freedom!” BRANDON PARK CEO, Superlative Technologies (dba SuprTEK), Inc. “Freedom Bank has been a valued business partner in our growth strategy during the past 7+ years and nearly 300% growth, supporting the many needs of a small business tailored to our industry specific requirements. The Freedom Bank Team has been supportive and professional providing capabilities and confidence from daily matters to our ability to win and execute additional contracts from a financial perspective.” ANDY CAMPANARO President , CMI Companies, Inc. “I truly feel like I am part of the family at Freedom Bank. Steve Witt’s solution based attitude and “get it done” work ethic is not only unmatched—it’s almost unheard of these days. CMI Companies would not be where it is without its partners at Freedom Bank always looking out for CMI’s best interests in the business world. The name Freedom Bank could not be more spot on because CMI has the freedom to buy additional equipment and vehicles as needed because we have access to the capital needed to grow our fleet, which grows our customer base. If you are not banking with Freedom you are missing out on a trustworthy business that thrives on customer service.” COVER PHOTOS Top Row, left to right: The Clay family worked with Senior Loan Officer, Christine Kern at Freedom Bank Mortgage to purchase their home; Mike Underwood, Senior Vice President & Team Leader at Freedom Bank with Mary Hay, President and Chief Executive Officer and James Rivera, Vice President of International Development and Resources, Inc. Middle Row, left to right: Dr. Zohra Darwish of Dental Aesthetic Arts with Jim Nelson, Senior Vice President & Relationship Management Officer at Freedom Bank; Freedom Bank’s very own Dan Marks and Kevin Mullins (a dedicated member of the Fair Oaks Volunteer Fire & Rescue Co.) with Chief and President Jonathan Woods and Chief Jack May and the Fair Oaks Volunteer Fire & Rescue Station’s new ambulance the Bank financed. Bottom Row, left to right: Marcus and Manuel Ordonez of Probity LLC with Kevin Curtis, Executive Vice President & Chief Lending Officer, and Darren Tully, Vice President & Relationship Management Officer at Freedom Bank; Dennis and Jordan Rice of JDA Custom Homes, Inc. with Rich Sobonya, Senior Vice President & Relationship Management Officer at Freedom Bank. a letter to our SHAREHOLDERS Dear Shareholders, On behalf of our Board of Directors and Management, we are pleased to report that in 2016 the Bank experienced growth in all major categories of assets and liabilities, achieving record performance in 2016 in terms of growth of assets and loans, and increase in net income. SIGNIFICANT INCREASE IN MARKET PRICE Our performance led to significant share price appreciation. The price of our stock started the year at $7.80 and finished the year at $11.00. INCREASED EARNINGS PER SHARE NOTWITHSTANDING CAPITAL RAISE Earnings per share rose from $0.40 in 2015 to $0.45 in 2016, notwithstanding the increase in outstanding shares resulting from the $6 million in capital raised during the first quarter. That additional capital allowed us to grow our assets to generate more revenue, thereby increasing our earnings per share. Funding for the robust asset growth was funded by core deposit growth, brokered certificates of deposit, and borrowings from the Federal Home Loan Bank of Atlanta. As we achieved our target deposit level in the fourth quarter, we began replacing brokered deposits with core deposits. As the brokered deposit certificates matured, they were redeemed and replaced with short term borrowing from the Federal Home Loan Bank of Atlanta, while the Bank obtained more permanent core funding. We repaid a significant portion of the year-end borrowings during the first quarter of 2017. OPERATIONS FOR 2016 NET INCOME Net income was $2,741,784 for the year ended December 31, 2016, a $1,023,214 or 59.5% increase over the $1,718,570 earned for 2015. This was the second consecutive year that net income exceeded the net income before taxes of the prior year. Increased net income resulted from larger top line revenue. Growth in loans and investments increased total interest income to $20,471,311 in 2016, up 21.1% from $16,901,078 in 2015. Total other income was $5,270,608, up 86.6% from $2,825,229 the prior year. Combined interest income and other income for 2016 was $25,741,919 up $6,015,612 or 30.5% over the combined income of $19,726,307 for 2015. EXPENSES Interest paid on deposits and borrowings increased $695,037 or 23.1% to $3,701,336 at December 31, 2016. The provision for possible loan losses increased in 2016 to $1,090,500, up from $672,500 the prior year. The increase was due primarily to the record loan growth for the year. Operating expenses increased to $16,795,899 in 2016 from $13,443,938 in 2015. Record non- interest income from the mortgage division required additional compensation expense for mortgage originations and bank paid closing costs related to mortgages that were more than covered by fees from the sale of the mortgages. There was also a rise in occupancy expense from additional space we leased to support revenue growth. FINANCIAL CONDITION AT DECEMBER 31, 2016 Total assets were $496,537,149 at December 31, 2016, up 24.0% from $400,437,524 the prior year. Loans had the highest yield and increased $88,022,350 (27.6%) to $407,091,960 at December 31, 2016. With the large increase in loans held for investment, the Bank increased the percentage of the allowance for possible loan losses from 0.98% at December 31, 2015 to 1.02% at December 31, 2016. Securities available for sale decreased $17,241,541 to $29,074,040 compared to the prior year. The Bank invested $15,035,844 in municipal bonds in 2016, classified as held to maturity. Together with cash and cash due from banks of $1,251,102, interest bearing deposits of $4,358,332, and $24,108,000 in Fed Funds, total liquid assets were $73,827,318 at December 31, 2016. Asset quality remains a primary strength of the Bank. Non performing assets as a percentage of loans were 0.19% at December 31, 2016 compared to 0.06% at December 31, 2015. Loans past due for regularly scheduled payments declined to 0.01% at December 31, 2016 from 0.28% of loans at December 31, 2015. Both compared favorably with peer banks. Asset growth was funded by large increases in core deposits. Non interest bearing deposits increased 21.4% to $62,941,221, up from $51,849,383 the prior year. Interest checking deposits rose 29.9% to $114,549,659 at December 31, 2016, up from $88,182,669 at December 31, 2015. Certificates of deposit were $218,980,247 at December 31, 2016, up $12,020,596 or 5.81% from the prior year as the Bank focused on growing core transaction accounts. The Bank had $43,714,286 in borrowings from the Federal Home Loan Bank of Atlanta at December 31, 2016, up from $6,200,000 at December 31, 2015. Capital increased to $51,656,614 at December 31, 2016, up 21.3% from $42,580,925 at December 31, 2015. This was due to the Bank’s successful capital raising efforts, as well as, retained earnings for the year. Capital ratios were leverage ratio 10.75%, tier I capital 12.32% and a total capital ratio of 13.30%, all above the regulatory levels to be considered well capitalized. Book value per share increased to $8.36 at December 31, 2016, up from $7.80 at December 31, 2015. The additional capital raised in 2015 and early 2016 will allow continued expansion in Northern Virginia. We are excited about our prospects for 2017 and beyond. Thank you for your continued support of Freedom Bank. CRAIG S. UNDERHILL CRAIG S. UNDERHILL President & CEO President & CEO RICHARD C. LITMAN RICHARD C. LITMAN Chairman of the Board Chairman of the Board Community Involvement & CHARITABLE ACTIVITIES As a thriving community bank, Freedom Bank is committed to giving back to the community we so proudly serve. In the past year, we had the honor of participating and contributing to numerous outstanding causes throughout the Northern Virginia area. We are dedicated to seeing our customers, our neighbors and our communities succeed. From left to right: Freedom Bank’s very own Dan Marks, Vice President and Relationship Management Officer, and Kevin Mullins, a dedicated member of the Fair Oaks Volunteer Fire & Rescue Co. for over 7 years, with Chief and President Jonathan Woods and Chief Jack May and the Fair Oaks Volunteer Fire & Rescue Station’s new ambulance. Freedom Bank is honored to finance this ambulance for Station 21 and the entire community it serves. The last three photos are from our January 2017 Customer Appreciation Party: Darren Tully, Vice President and Relationship Management Officer at Freedom Bank with Lina and Zak Elyasi of Government MLO Supplies USA and Erik Kudla, managing partner at Brick Lane. Steve Enterline, Owner of Enterline Insurance Agency, LLC and Ed Lull, Senior Vice President and Relationship Management Officer at Freedom Bank and RK Nohria, President of Tristate Brokers Corporation with his wife, Neena. Erin Moore, Vice President of Loan Administration Manager and Quality Review Officer, Kevin Mullins, Vice President and Loan Administration Officer and Jamie Adkins, Assistant Vice President and Senior Mortgage Operations Officer at Freedom Bank. HIGHLIGHTS OF OUR COMMUNITY INVOLVEMENT:   Our branches collected donations of toys and other items in December for Kyle’s Kamp Holiday Store where children battling cancer can go and pick out toys and gifts for themselves and their families since going to the store is not an option for these children.   In the beginning of November, the branches hosted a food and household items drive for Britepaths Complete the Circle FOODraiser to benefit struggling individuals and families in the Northern Virginia region.   Freedom Bank continued to support Veterans Moving Forward through contributions for every VA mortgage loan closed, purchased or refinanced.   The Bank supported the Korean American Scholarship Foundation and the worthy students who benefit from the scholarships.   Senior Loan Officer, George Decker led a Freedom Bank clothing drive for Women Giving Back. He was able to collect well over 300 pounds of clothing.   The Bank sponsored the Clifton Lions Club Labor Day Car Show that fundraised for Life with Cancer® and the Northern Virginia Therapeutic Riding Program.   Freedom Bank was excited to donate our former boardroom chairs from the Bank’s conference room to the Fairfax County Fire and Rescue Department, Fair Oaks Station 21 for their use at the station. NEW HOPE FOR HAITI In November, thirty Freedom Bank staff members volunteered at the Feed My Starving Children Mobile Pack at New Hope Church in Lorton, VA to pack meals for the victims of Hurricane Matthew. From left to right: Taylor Curtis and Kathleen Johnson, Assistant Vice President and Marketing Manger, filling meal bags in the assembly line. Team Freedom Bank with packed meals ready to be shipped. Senior Vice President and Relationship Management Officer, Steve Witt, and his daughter assembling meals for the people of Haiti. FINANCIAL HIGHLIGHTS ASSET GROWTH Growth (%) 21% 15% 15% 25% 17% 24% 500 400 300 200 100 0 1.0 0.8 0.6 0.4 0.2 0 $496 $400 $343 CAGR: 19% $274 $239 $208 2011 2012 2013 2014 2015 2016 Assets ($mm) LOAN GROWTH Growth (%) 10% 11% 28% 27% 14% 28% 500 400 300 200 100 0 CAGR: 21% $407 $319 $279 $220 $154 $172 2011 2012 2013 2014 2015 2016 Loans HFI ($mm) LOANS PAST DUE 0.45% 0.28% 0.0% 0.0% 0.02% 0.0% 2011 2012 2013 2014 2015 2016 Total Past Due / Total Loans Table of CONTENTS 1 2 2 4 5 6 7 9 Independent Auditors’ Report on the Financial Statements 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 30 Shareholder & Company Information Independent AUDITORS' REPORT TO THE BOARD OF DIRECTORS AND STOCKHOLDERS THE FREEDOM BANK OF VIRGINIA Fairfax, Virginia We have audited the accompanying balance sheets of The Freedom Bank of Virginia (a Virginia corporation) as of December 31, 2016 and 2015, and the related statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2016. These financial statements are the responsibility of the Bank’s management. Our responsibility is to express an opinion on these financial statements based on our audits. AUDITORS' RESPONSIBILITY We conducted our audits in accordance with the auditing standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our 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, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America. THOMPSON GREENSPON Fairfax, Virginia March 15, 2017 1 FINANCIAL STATEMENTS BALANCE SHEETS Years Ended December 31 2016 and 2015 ASSETS Cash and Due from Banks Interest Bearing Deposits with Banks Federal Funds Sold Securities Available-for-Sale Securities Held-to-Maturity Restricted Stock Investments 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 2016 $ 1,251,102 2015 $ 1,266,818 4,358,332 5,617,821 24,108,000 15,000,000 29,074,040 46,315,581 15,035,844 3,718,400 7,488,194 — 1,602,550 7,634,844 407,091,960 319,069,610 (4,150,081) (3,133,420) 402,941,879 315,936,190 1,425,682 1,351,819 1,891,600 2,281,726 1,610,531 720,200 936,995 1,604,000 2,221,695 1,553,830 $496,537,149 $400,437,524 NOTE: The Notes to Financial Statements are an integral part of these statements. 2 FREEDOM BANK OF VIRGINIALIABILITIES Deposits Demand Deposits Non-interest Bearing Interest Bearing Savings Deposits Time Deposits Total Deposits Federal Home Loan Bank Advances Other Accrued Expenses Accrued Interest Payable Total Liabilities STOCKHOLDERS' EQUITY 2016 2015 $ 62,941,221 $ 51,849,383 114,549,659 88,182,669 2,921,102 2,573,038 218,980,247 206,959,651 399,392,229 349,564,741 43,714,286 1,598,948 175,072 6,200,000 1,994,642 97,216 444,880,535 357,856,599 Preferred stock, $0.01 par value, 5,000,000 shares authorized: 0 shares issued and outstanding, 2016; Common stock, $0.01 par value, 25,000,000 shares authorized: 23,000,000 shares voting and 2,000,000 shares non-voting, 5,550,565 shares issued and outstanding, 2016; Common stock, $3.16 par value, 15,000,000 shares authorized: 5,455,820 shares issued and outstanding, 2015; — — Voting Common Stock 5,550,565 and 5,455,820 shares issued and outstanding at December 31, 2016 and 2015, respectively Non-Voting Common Stock 55,506 17,227,330 628,707 shared issued and outstanding at December 31, 2016 6,287 — Additional Paid-in Capital Accumulated Other Comprehensive Income (loss), net Retained Earning Total Stockholders’ Equity 47,958,932 24,282,805 (548,380) (371,695) 4,184,269 1,442,485 51,656,614 42,580,925 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 496,537,149 $ 400,437,524 NOTE: The Notes to Financial Statements are an integral part of these statements. 3 FINANCIAL STATEMENTSSTATEMENTS OF OPERATIONS Years Ended December 31 2016, 2015 and 2014 INTEREST INCOME Interest and Fees on Loans Interest on Investment Securities Interest on Federal Funds Sold Total Interest Income INTEREST EXPENSE Interest on Deposits Net Interest Income 2016 $19,287,266 1,174,707 9,338 2015 $16,210,289 669,238 21,551 2014 $13,098,078 535,438 23,428 20,471,311 16,901,078 13,656,944 3,701,336 3,006,299 2,267,925 16,769,975 13,894,779 11,389,019 PROVISION FOR POSSIBLE LOAN LOSSES 1,090,500 672,500 486,000 Net Interest Income After Provision for Possible Loan Losses 15,679,475 13,222,279 10,903,019 OTHER INCOME Gain on Sale of Mortgage Loans Service Charges and Other Income Increase in Cash Surrender Value of Bank-owned Life Insurance Total Other Income OPERATING EXPENSES 4,986,961 223,616 2,541,771 222,330 60,031 61,128 5,270,608 2,825,229 260,083 241,475 58,964 560,522 Officers and Employee Compensation and Benefits 10,726,227 8,583,258 5,974,486 Occupancy Expense Equipment and Depreciation Expense Insurance Expense Professional Fees Data and Item Processing Business Development Franchise Taxes Mortgage Fees and Settlements Other Operating Expenses Total Operating Expenses Income Before Income Taxes 982,653 536,758 322,479 1,045,666 908,258 203,717 385,787 995,428 688,926 839,671 450,820 291,362 885,601 921,846 189,117 310,396 424,460 547,407 622,690 370,921 237,421 844,756 816,954 185,868 260,048 80,105 469,894 16,795,899 13,443,938 4,154,184 2,603,570 9,863,143 1,600,398 NOTE: The Notes to Financial Statements are an integral part of these statements. 4 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA INCOME TAX EXPENSE NET INCOME 2016 1,412,400 2015 885,000 2014 — $ 2,741,784 $ 1,718,570 $ 1,600,398 EARNINGS PER COMMON SHARE – BASIC $ 0.45 $ 0.40 $ 0.42 EARNINGS PER COMMON SHARE – DILUTED $ 0.44 $ 0.39 $ 0.40 WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – DILUTED 6,049,092 4,336,225 3,833,821 6,172,328 4,392,932 3,978,880 STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 2016, 2015 and 2014 Net Income Other Comprehensive Income (Loss): Unrealized holding gain (loss) arising during the year, net of tax expense benefit of $44,516, $136,126 and $161,562 in 2016, 2015 and 2014, respectively 2016 $ 2,741,784 2015 $ 1,718,570 2014 $ 1,600,398 (176,685) (252,806) 300,043 COMPREHENSIVE INCOME $ 2,565,099 $ 1,465,764 $ 1,900,441 NOTE: The Notes to Financial Statements are an integral part of these statements. 5 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIASTATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31 2016, 2015 and 2014 SHARES OF COMMON STOCK COMMON STOCK ADDITIONAL PAID-IN CAPITAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS (DEFICIT) TOTAL STOCKHOLDERS' EQUITY *3,468,149 $12,042,200 $ 16,371,940 $ (418,932) $ (1,876,483) $ 26,118,725 BALANCE (DEC. 31, 2013) Net Income Other Comprehensive Income Stock Warrants Exercised — — 73 — — 231 — — — 379 — Eleven-for-Ten Stock Split 346,807 Stock Options Exercised 23,260 73,501 66,794 Sale of Common Stock 187,060 591,110 1,009,781 Stock-based Compensation — — 8,258 BALANCE (DEC. 31, 2014) Net Income Other Comprehensive Loss Stock Warrants Exercised — — 75 — — 237 — — 399 Stock Options Exercised 9,212 29,110 30,740 Sale of Common Stock (Rights Offering) Sale of Common Stock (Private Placement) 244,713 773,293 1,120,364 1,176,471 3,717,648 5,618,784 Stock-based Compensation — — 55,366 — 1,600,398 1,600,398 300,043 — — — — — — — — — — — 300,043 610 — 140,295 1,600,891 8,258 — 1,718,570 1,718,570 (252,806) — — — — — — — — — — — (252,806) 636 59,850 1,893,657 9,336,432 55,366 4,025,349 12,707,042 17,457,152 (118,889) (276,085) 29,769,220 BALANCE (DEC. 31, 2015) Net Income Change in Par Value Other Comprehensive Loss Stock Warrants Exercised Stock Options Exercised Sale of Common Stock (Private Placement) 5,455,820 17,227,330 24,282,805 (371,695) 1,442,485 42,580,925 — — — 12,818 4,752 — — (17,172,772) 17,172,772 — — — (176,685) — 128 48 115,234 29,748 705,882 7,059 6,244,383 2,741,784 2,741,784 — — — — — — — (176,685) 115,362 29,796 6,251,442 113,990 — — — — Stock-based Compensation — — 113,990 BALANCE (DEC. 31, 2016) 6,179,272 $ 61,793 $ 47,958,932 $ (548,380) $ 4,184,269 $ 51,656,614 *Shares of common stock retroactively adjusted for the eleven-for-ten stock split effective April 1, 2014 is 3,814,956 as of December 31, 2013. NOTE: The Notes to Financial Statements are an integral part of these statements. 6 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA STATEMENTS OF CASH FLOWS Years Ended December 31 2016, 2015 and 2014 CASH FLOWS FROM OPERATING ACTIVITIES 2016 2015 2014 Net Income $2,741,784 $1,718,570 $1,600,398 Non-Cash Items Included in Net Income Depreciation and Amortization Provision for Possible Loan Losses Net Amortization of Available-for-Sale Securities Net Amortization of Held-to-Maturity Securities Gain on Sale of Available-for-Sale Securities 229,487 1,090,500 1,295,554 27,967 (31,343) 233,790 672,500 311,811 — 167,795 486,000 202,071 — (24,257) (26,693) Loans Held for Sale Originated (178,909,688) (92,094,836) (12,060,141) Proceeds from the Sales of Loans Held for Sale 179,056,338 85,109,967 12,179,066 Stock-based Compensation Expense Loss on Disposal of Equipment Deferred Income Tax Benefit 113,990 2,771 55,366 — 8,258 — (287,600) (284,000) (461,000) Increase in Cash Surrender Value of Bank-Owned Life Insurance (60,031) (61,128) (58,964) (Increase) Decrease in Accrued Interest Receivable Other Assets Increase (Decrease) in Other Accrued Expenses Accrued Interest Payable (387,824) (99,771) (12,185) (118,191) (166,898) (126,789) (395,694) 77,856 932,506 4,912 209,659 14,994 Net Cash Provided (Used) by Operating Activities 4,551,882 (3,642,761) 1,967,756 CASH FLOWS FROM INVESTING ACTIVITIES Federal Funds Sold, net Interest Bearing Deposit with Banks Loan Originations, net (9,108,000) 1,259,489 9,837,000 (8,020,000) (689,310) 2,943,407 (88,096,189) (40,304,911) (59,212,258) Purchase of Available-for-Sale Securities (32,882,393) (27,118,247) (14,665,874) Maturities, Calls and Paydowns of Securities Available-for-Sale Proceeds from Sales of Securities Available-for-Sale Purchase of Restricted Stock Investments Sale of Restricted Stock Investments Paydowns of Held-to-Maturity Securities Acquisition of Bank Equipment 7,551,912 26,022,799 (4,470,350) 2,354,500 — 5,798,614 1,622,518 5,107,507 6,289,860 (498,550) (326,000) — 5,610 — 39,069 (706,188) (937,740) (123,220) Net Cash Used By Investing Activities (98,305,972) (51,470,496) (68,550,477) NOTE: The Notes to Financial Statements are an integral part of these statements. 7 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIA STATEMENTS OF CASH FLOWS Years Ended December 31 2016, 2015 and 2014 CASH FLOWS FROM FINANCING ACTIVITIES 2016 2015 2014 Increase in Deposits, net 49,827,488 37,876,757 64,534,437 Advances from Federal Home Loan Bank 37,514,286 6,200,000 — Proceeds From Stock Options and Warrants Exercised 145,158 60,486 140,905 Proceeds From Sale of Stock, net 6,251,442 11,230,089 1,600,891 Net Cash Provided by Financing Activities 93,738,374 55,367,332 66,276,233 NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS CASH AND DUE FROM BANKS, BEGINNING OF YEAR CASH AND DUE FROM BANKS, END OF YEAR NONCASH INVESTING ACTIVITY (15,716) 254,075 (306,488) 1,266,818 1,012,743 1,319,231 $ 1,251,102 $ 1,266,818 $ 1,012,743 Unrealized (Loss) Gain on Securities Available-for-Sale, net $ (82,672) $ (252,806) $ 300,043 Transfer of Securities from Available-for-Sale to Held-to-Maturity $15,158,552 $ — $ — Unrealized loss on Securities prior to transfer to Held-to-Maturity, net SUPPLEMENTAL INFORMATION $ 94,741 $ — $ — Cash Paid During the Year for Interest $ 3,503,570 $ 2,990,458 $ 2,252,931 Cash Paid During the Year for Income Taxes $ 1,628,000 $ 964,000 $ 438,000 NOTE: The Notes to Financial Statements are an integral part of these statements. From left to right: Craig Underhill, President & CEO at Freedom Bank. Jay Jaiswal, CEO of Ascend Healthcare Systems and Bob Willey, Executive Vice President of Corporate Banking at Freedom Bank. Renzo Villacorta of RVS Holdings and Investment Company, Inc. and Steve Witt, Senior Vice President & Relationship Management Officer at Freedom Bank. 8 2016 ANNUAL REPORTNOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2016, 2015 and 2014 1. Nature of Operations and Summary of Significant Accounting Policies The accounting and reporting policies of The Freedom Bank of Virginia (the Bank) conform to generally accepted accounting principles in the United States of America (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, Fairfax and Reston, 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 in the United States of America 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. Significant estimates affecting the Bank’s financial statements relate to the allowance for loan losses, the valuation of the deferred tax assets and other-than-temporary impairment assessments for investment securities. Actual results could differ from those estimates. INTEREST BEARING DEPOSIT 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. The unrealized holding gain or loss for securities transferred from available-for-sale to held-to-maturity remains in accumulated other comprehensive income and is amortized over future years. 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 (loss) income, net of their tax effect. 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 (loss). The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating the interest method over the period to maturity. Declines in the fair value of individual held-to-maturity and available-for-sale securities below their cost that are deemed to be other than temporary result in write-downs of the individual securities to their fair value. The related write-downs are included in earnings as realized losses. Gains and losses on sales of securities are recorded on the trade date and are determined using the specific-identification method. Federal Reserve Bank stock, Federal Home Loan Bank (FHLB) stock, and Community Bankers Bank stock are considered restricted investment securities, are carried at cost and are evaluated annually for impairment. The stock is required in order to be a member or for borrowings. 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. 9 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIA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. The changes in fair value related to movements in market interest rates of the rate lock commitments are generally inconsequential. 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. The allowance consists of two basic components: the specific allowance and the pooled allowance. The specific allowance component is used to individually establish an allowance for loans considered impaired. 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. The pooled component is used to estimate the losses inherent in the pools of non-impaired loans. These loans are then also segregated by loan type and allowance factors are assigned by management based on delinquencies, loss history, trends in volume and terms of loans, effects of changes in lending policy, the experience and depth of management, national and local economic trends, concentrations of credit, results of the loan review system and the effect of external factors (i.e., competition and regulatory requirements). Current economic conditions take into account the average unemployment rate for the Northern Virginia area and for the nation, with the most significance given to the local data. The allowance factors assigned differ by loan type. 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. 10 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA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 had no other real estate owned at December 31, 2016, 2015 and 2014. BANK-OWNED LIFE INSURANCE The Bank entered into bank-owned single premium 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 income. The Bank monitors the financial strength and condition of both counterparties. STOCKHOLDERS' EQUITY At December 31, 2014, warrants were outstanding and exercisable to purchase 367,553 shares of common stock at $8.36 per share if exercised by January 15, 2015, and 71,121 shares of common stock at $8.36 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 and the eleven-for-ten stock split that was effective on April 1, 2014. On February 20, 2014, the Bank declared an eleven-for-ten stock split, effective for stockholders of record on April 1, 2014. All references to share and per share amounts in the financial statements have been restated to reflect the stock splits. On October 31, 2014, the Bank released an Offering Memorandum for up to $4,000,000 of common stock, par value $3.16 per share, at an offering price of $9.00 per share (“capital offering”). The offering was for a maximum of 444,445 shares of common stock. The offering closed December 12, 2014 and the amount of funds raised from the capital offering, net of related expenses, was $1,600,891. Common stock of 187,060 shares was issued. Capital funds raised were allocated to common stock and additional paid-in capital. On December 22, 2014, the Bank released an Offering Memorandum for subscription rights to holders of common stock (“rights offering”). Pursuant to this rights offering, the Bank offered subscription rights to purchase up to 66,667 units (each a “unit”) at a per unit price of $45.00. Each unit will consist of five shares of common stock and one two-year warrant to purchase one share of common stock at a price of $9.00 per share. Shareholders who own outstanding warrants to purchase common stock may surrender these warrants in exchange for a credit of $.64 per warrant surrendered toward the purchase price of units they purchase in this rights offering. The offering closed January 30, 2015. The amount of funds raised from the rights offering, net of related expenses, was $1,893,657. Common stock of 244,713 shares was issued. Capital funds raised were allocated to common stock and additional paid-in capital. During December 2015, the Bank entered into purchase agreements for the private placement of an aggregate of $16 million of its common stock to institutional investors. The purchase agreements encompass two closings; the first closing on December 29, 2015, and the second closing upon satisfaction of certain conditions as set forth in the agreements. The first closing raised capital of $9,336,432, net of related expenses of $663,572, encompassing 1,176,471 shares. Offering expenses include $250,000 for the lead investor as reimbursement of expenses and related matters in connection with the consummation of the equity investment. The purchase agreements required an amendment to the Bank’s articles of incorporation whereby the amount of authorized capital will consist of 25,000,000 shares of common stock at $0.01 par value per share, of which 23,000,000 will consist of shares of voting common stock and 2,000,000 will consist of non-voting common stock, and 5,000,000 shares of preferred stock at $0.01 par value per share. In addition, the purchase agreement required upon request of the lead investor to cause an increase in the number of directors on the Board by one director and to appoint a person nominated by such lead investor. The Articles of Incorporation Amendment and the change to the Board of Directors was effective March 16, 2016. The second closing raised funds of $6,251,442 with 77,175 shares of voting common stock and 628,707 shares of non-voting common stock. In addition, the institutional investors hold a registration rights agreement that permits them to request the Bank register a Form S-1 (Registration Statement under the Securities Act of 1933), as outlined in the agreement, if the Bank has formed a holding company. 11 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIAThe proceeds of the capital and rights offerings and the private placement are for general corporate purposes which may include improving the Bank’s regulatory capital position and supporting future growth. The rights, preferences, and privileges of the voting and non-voting common stock shall be in all respects and for all purposes identical except with respect to voting power. The holders of voting common stock shall exclusively possess all voting power and each share is entitled to one vote. The holders of non-voting common stock have no voting power. Holders of common stock are entitled to receive an equal amount of dividends per share if, as and when declared from time to time by the Board of Directors. Shares of non-voting common stock may be converted into shares of voting common stock at the option of the holder thereof in accordance with the provisions outlined in the amended articles of incorporation. Shares of preferred stock may be issued in one or more series. Authority is expressly vested in the Board of Directors at any time and from time to time to cause the preferred stock to be issued in one or more series and, to the fullest extent permitted by law, to fix and determine the preferences, limitations and relative rights of the shares of any series of preferred stock so established and provide for the issuance of shares thereof. Comprehensive income represents all changes in equity that result from recognized transactions and other economic events of the period. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting principles generally accepted in the United States of America are included in comprehensive income but excluded from net income, such as unrealized gains and losses on certain investments in debt and equity securities. 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 determined that recent profitability and projections of future taxable income will be adequate to absorb 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. The Bank is not currently under audit by any income tax jurisdiction. The Bank has no uncertain tax positions that qualify for either recognition or disclosure in the financial statements, and no interest and penalties have been recorded in the accompanying financial statements related to uncertain tax positions. EARNINGS PER SHARE (EPS) Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the year. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Bank. 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 and Chief Executive Officer which was subsequently amended effective April 20, 2016. The agreement provides for a base salary, performance bonus, and other benefits. The agreement has an initial term of twenty-four months from the amended effective date and shall be automatically extended and renewed for an additional successive twelve months unless either party provides a written notice of non-renewal as per 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 12 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA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. OFF-BALANCE SHEET CREDIT RELATED FINANCIAL INSTRUMENTS In the ordinary course of business, the Bank has entered into commitments to extend credit, including commitments under credit card arrangements, commercial letters of credit, and standby letters of credit. Such financial instruments are recorded when they are funded. RECENT ACCOUNTING PRONOUNCEMENTS ASU 2014-09 In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This standard also includes expanded disclosure requirements that result in an entity providing users of the financial statements with comprehensive information about the nature, amount, timing, and uncertainty of revenue and cash flows arising from the entity’s contracts with customers. ASU 2014-09 is effective for non-public entities for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016. The Bank is currently in the process of evaluating the impact of adoption of this ASU on the financial statements. ASU 2016-02 In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in Accounting Standards Codification (ASC) Topic 840, Leases (FAS 13). ASU 2016-02 requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and provide additional disclosures. ASU 2016-02 is effective for non-public entities for fiscal years beginning after December 15, 2019, with early adoption permitted. The Bank is currently in the process of evaluating the impact of adoption of this ASU on the financial statements. ASU 2016-13 In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The guidance in ASU 2016-13 replaces the current incurred loss impairment methodology, with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to estimate credit losses. ASU 2016-13 is effective for non-public entities for fiscal years beginning after December 15, 2020, with early adoption permitted for fiscal years beginning after December 15, 2018. The Bank is currently in the process of evaluating the impact of adoption of this ASU on the financial statements. RECLASSIFICATION Certain items in the 2015 financial statements have been reclassified to conform to the 2016 financial statement presentation. SUBSEQUENT EVENTS The date to which events occurring after December 31, 2016, the date of the most recent balance sheet, have been evaluated for possible adjustment to the financial statements or disclosure is March 15, 2017, which is the date on which the financial statements were available to be issued. 2. Restriction of Cash and Due from Banks The Bank is required to maintain reserve funds in cash or on deposit with the Federal Reserve. The required reserve at December 31, 2016, 2015 and 2014 was $1,269,000, $1,012,000 and $759,000, respectively. 13 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIA3. Investments The amortized cost and fair values of securities as shown in the balance sheets of the Bank are as follows: DEC. 31, 2016 Available-for-Sale Corporate Securities Mortgage Backed Securities SBA Loan Pools Total Available-for-Sale Held-to-Maturity Municipal Securities AMORTIZED COSTS GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ 3,010,075 $ 9,796 $ (26,861) $ 2,993,010 19,921,547 6,841,442 29,773,064 912 4,593 15,301 (587,050) (100,414) (714,325) 19,335,409 6,745,621 29,074,040 15,035,844 — (777,676) 14,258,168 TOTAL INVESTMENT SECURITIES $ 44,808,908 $ 15,301 $ (1,492,001) $ 43,332,208 DEC. 31, 2015 Available-for-Sale AMORTIZED COSTS GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE U.S. Government and Agency Securities $ 5,638,861 $ — $ (35,276) $ 5,603,585 Corporate Securities 2,053,310 50 (17,217) 2,036,143 Mortgage Backed Securities 26,682,815 12,930 (412,482) 26,283,263 Municipal Securities SBA Loan Pools 2,254,006 — (12,511) 2,241,495 10,258,426 10,374 (117,705) 10,151,095 TOTAL INVESTMENT SECURITIES $ 46,887,418 $ 23,354 $ (595,191) $ 46,315,581 The amortized cost and estimated fair value of debt securities at December 31, 2016, 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 COST FAIR VALUE AMORTIZED COST FAIR VALUE $ — $ — $ — $ — 1,005,495 1,012,960 2,004,580 1,980,050 315,658 612,973 314,106 587,520 6,841,442 6,745,621 14,107,213 13,356,542 9,851,517 9,738,631 15,035,844 14,258,168 Mortgage Backed Securities 19,921,547 19,335,409 — — $29,773,064 $ 29,074,040 $ 15,035,844 $ 14,258,168 14 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIAExpected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. At December 31, 2016 and 2015, U.S. Government and agency securities and mortgage backed securities with carrying values of $16,610,637 and $10,950,446, 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, 2016, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows: LESS THAN 12 MONTHS OVER 12 MONTHS GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE Available-for-Sale Corporate Securities $ 26,861 $ 973,139 $ — $ — Mortgage Backed Securities $ 511,978 $ 16,717,398 $ 75,072 $ 2,364,976 SBA Loan Pools Held-to-Maturity $ 42,326 $ 2,482,812 $ 58,088 $ 3,170,986 Municipal Securities $ 776,124 $ 13,944,062 $ 1,552 $ 314,106 Management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Bank to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. At December 31, 2016, 50 debt securities with an unrealized loss for less than one year and 12 debt securities with an unrealized loss for greater than one year depreciated less than nine percent from the Bank amortized cost basis. Thirty 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 and thirty of the securities are municipal 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. Restricted investments consists of the following at December 31: Federal Reserve Bank Federal Home Loan Bank Community Bankers Bank TOTALS 2016 2015 $ 1,434,100 $ 964,650 2,218,300 66,000 571,900 66,000 $ 3,718,400 $ 1,602,550 15 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIA4. LOANS RECEIVABLE Loans receivable include the following at December 31: Commercial Consumer and Other Real Estate Subtotals Deferred Loan Fees TOTALS 2016 2015 $ 60,278,401 $ 44,054,331 16,517,598 13,769,129 331,289,560 262,012,630 408,085,559 319,836,090 (993,599) (766,480) $ 407,091,960 $ 319,069,610 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. 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 2016 Allowance for Possible Loan Losses COMMERCIAL & INDUSTRIAL REAL ESTATE COMMERCIAL REAL ESTATE CONSTRUCTION REAL ESTATE RESIDENTIAL CONSUMER TOTAL Beginning Balance $ 371,094 $ 1,597,407 $ 777,024 $ 294,592 $ 93,303 $ 3,133,420 Charge-offs Recoveries Provision — — — — — — (115,378) — (115,378) — 41,539 41,539 171,135 713,748 61,304 223,401 (79,088) 1,090,500 Ending Balance $ 542,229 $ 2,311,155 $ 838,328 $ 402,615 $ 55,754 $ 4,150,081 Individually Evaluated for Impairment — — — — — — Collectively Evaluated for Impairment 542,229 2,311,155 838,328 402,615 55,754 4,150,081 Loans Receivable Ending Balance $60,278,401 $200,637,913 $52,610,598 $78,041,049 $16,517,598 $408,085,559 Individually Evaluated for Impairment $ 210,136 $ 873,437 $ 333,530 $ 729,041 $ — $ 2,146,144 Collectively Evaluated for Impairment 60,068,265 199,764,476 52,277,068 77,312,008 16,517,598 405,939,415 16 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIAYEAR 2015 Allowance for Possible Loan Losses COMMERCIAL & INDUSTRIAL REAL ESTATE COMMERCIAL REAL ESTATE CONSTRUCTION REAL ESTATE RESIDENTIAL CONSUMER TOTAL Beginning Balance $ 331,078 $ 1,326,949 $ 711,857 $ 215,896 $ 100,027 $ 2,685,807 Charge-offs Recoveries Provision (224,887) — — — — — — — — — (224,887) — 264,903 270,458 65,167 78,696 (6,724) 672,500 Ending Balance $ 371,094 $ 1,597,407 $ 777,024 $ 294,592 $ 93,303 $ 3,133,420 Individually Evaluated for Impairment $ — $ — $ — $ — $ — $ — Collectively Evaluated for Impairment 371,094 1,597,407 777,024 294,592 93,303 3,133,420 Loans Receivable Ending Balance $ 44,054,331 $146,496,390 $ 41,034,055 $74,482,185 $13,769,129 $319,836,090 Individually Evaluated for Impairment $ 106,052 $ 950,823 $ 93,529 $ 892,265 $ — $ 2,042,669 Collectively Evaluated for Impairment 43,948,279 145,545,567 40,940,526 73,589,920 13,769,129 317,793,421 An analysis of non-accrual and past due loans is as follows at December 31: YEAR 2016 Commercial Non-Real Estate 30-59 DAYS PAST DUE 60-89 DAYS PAST DUE 90 DAYS OR MORE PAST DUE TOTAL PAST DUE TOTAL FINANCING RECEIVABLES NONACCRUAL LOANS CURRENT Commercial and Industrial $ — $ — $ — $ — $ 60,278,401 $ 60,278,401 $ 62,811 Commercial Real Estate Owner Occupied Non-Owner Occupied Construction Residential Commercial Consumer Non-Real Estate Automobile Other Residential First Trusts Equity Lines TOTALS — — — — — — — — — — — — — 1,338 — — — — — 83,919,319 83,919,319 — 116,718,594 116,718,594 — — 333,530 333,530 36,952,074 37,285,604 333,530 — — — — — 15,324,994 15,324,994 — 796,054 796,054 1,338 15,720,206 15,721,544 — 66,294,678 66,294,678 546,500 546,500 11,199,871 11,746,371 — — — — — $ — $ 1,338 $ 880,030 $ 881,368 $407,204,191 $408,085,559 $ 396,341 17 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIAYEAR 2015 Commercial Non-Real Estate 30-59 DAYS PAST DUE 60-89 DAYS PAST DUE 90 DAYS OR MORE PAST DUE TOTAL PAST DUE TOTAL FINANCING RECEIVABLES NONACCRUAL LOANS CURRENT Commercial and Industrial $ — $10,403 $ — $ 10,403 $ 44,043,928 $ 44,054,331 $ 106,052 Commercial Real Estate Owner Occupied Non-Owner Occupied Construction Residential Commercial Consumer Non-Real Estate Automobile Other Residential First Trusts Equity Lines TOTALS — — — — — — — 849,714 — — — — — — — — — — — — — — — 48,806 48,806 64,675,090 64,723,896 — 81,772,494 81,772,494 — — — 22,957,943 22,957,943 93,529 — 18,076,112 18,076,112 — 334,092 334,092 — 13,435,037 13,435,037 — 63,758,297 63,758,297 849,714 9,874,174 10,723,888 — — — — — $ 849,714 $10,403 $48,806 $ 908,923 $318,927,167 $319,836,090 $ 199,581 An analysis of impaired loans based on loan segment is as follows at December 31: Commercial and Industrial 210,136 210,136 YEAR 2016 With No Related Allowance Recorded: Real Estate Construction Commercial Residential Commercial and Industrial TOTAL Real Estate YEAR 2015 With No Related Allowance Recorded: Real Estate Construction Commercial Residential Commercial and Industrial TOTAL Real Estate RECORDED INVESTMENT UNPAID PRINCIPAL BALANCE RELATED ALLOWANCE FOR LOAN LOSSES AVERAGE RECORDED INVESTMENT INTEREST INCOME RECOGNIZED $ 333,530 $ 333,530 $ — $ 225,054 $ — 873,437 729,041 210,136 873,437 729,041 210,136 1,936,008 1,936,008 — — — — — 880,030 955,336 251,625 2,060,420 251,625 44,470 13,977 10,174 58,447 10,174 RECORDED INVESTMENT UNPAID PRINCIPAL BALANCE RELATED ALLOWANCE FOR LOAN LOSSES AVERAGE RECORDED INVESTMENT INTEREST INCOME RECOGNIZED $ 93,529 $ 93,529 $ — $ 326,433 $ — 950,823 892,265 106,052 950,823 892,265 106,052 1,936,617 1,936,617 — — — — — 964,813 907,843 219,803 2,199,089 219,803 51,775 32,039 4,454 83,814 4,454 Commercial and Industrial 106,052 103,052 18 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA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. An analysis of the credit quality indicators is as follows at December 31: YEAR 2016 Commercial – Non-Real Estate PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS Commercial and Industrial $ 59,930,404 $ 136,523 $ 211,474 $ — $ — Commercial – Real Estate Owner Occupied Non-Owner Occupied Construction Residential Commercial Consumer – Non-Real Estate Automobile Other Residential First Trusts Equity Lines TOTALS 78,866,162 116,718,594 36,952,074 15,324,994 796,054 15,721,544 66,156,311 10,437,924 5,053,157 — — — — — — — 333,530 — — — 111,222 761,947 27,145 546,500 — — — — — — — — — — — — — — — — $ 400,904,061 $ 6,062,849 $ 1,118,649 $ — $ — From left to right: Charles Einsmann of Clear Sky Properties, Don Beeren and Camille Berry of Beeren & Barry Investments, LLC. Salma Sufi, Vice President & Branch Manager at Freedom Bank with John and Teresa Dodds of Dodds & Associates, PLLC. Ronny Sangid DDS Dentist with Duke Dental Care; Khaled Hasan Manager and Owner of Advanced Luxury Transportation; and Mike Underwood, Senior Vice President & Team Leader at Freedom Bank. NOTE: The Notes to Financial Statements are an integral part of these statements. 19 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIAYEAR 2015 Commercial – Non-Real Estate PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS Commercial and Industrial $ 43,784,412 $ 163,867 $ 106,052 $ — $ — Commercial – Real Estate Owner Occupied Non-Owner Occupied Construction Residential Commercial Consumer – Non-Real Estate Automobile Other Residential First Trusts Equity Lines TOTALS 60,477,475 81,772,494 22,864,415 18,076,112 334,092 13,435,037 63,523,134 9,151,155 3,676,619 569,802 — — — — — 235,164 844,853 — 93,528 — — — — 727,879 — — — — — — — — — — — — — — — — $ 313,418,326 $ 4,920,503 $1,497,261 $ — $ — 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, 2016 and 2015. 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 $3,947,968, and $2,431,316 at December 31, 2016 and 2015, respectively. New loans made to such related parties amounted to $2,746,485 and $2,484,992, and payments amounted to $1,229,833 and $2,718,990, at December 31, 2016 and 2015, respectively. 5. BANK PREMISES AND EQUIPMENT Bank premises and equipment include the following: Furniture and Equipment Leasehold Improvements Software Total cost Less Accumulated Depreciation 2016 2015 $ 1,419,660 $ 1,299,877 1,111,336 58,345 485,762 58,340 2,589,341 1,843,979 (1,163,659) (1,123,779) NET BANK PREMISES AND EQUIPMENT $ 1,425,682 $ 720,200 Depreciation and amortization of bank premises and equipment charged to expense amounted to $229,487, $233,790 and $167,795 in 2016, 2015 and 2014, respectively. 20 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA6. DEPOSITS Time deposits in denominations that meet or exceed the FDIC minimum limit of $250,000 or more totaled $68,592,296 and $46,086,607 at December 31, 2016 and 2015, respectively. The following are time deposits maturing in years ending December 31: 2017 2018 2019 2020 2021 TOTAL $ 165,467,257 37,327,902 6,914,026 6,673,344 2,597,718 $ 218,980,247 The Bank held related party deposits of approximately $9,686,000 and $11,577,000 at December 31, 2016 and 2015, respectively. 7. BORROWINGS AND ADVANCES At December 31, 2016 and 2015, 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, 2016 and 2015. At December 31, 2016 and 2015, the Bank had an additional $6,000,000 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. The borrowings are secured by $200,000, plus any earnings credited, held in a cash and correspondent account that is recorded as cash and due from banks on the balance sheets. There were no borrowings on this line at December 31, 2016 and 2015. At December 31, 2016 and 2015, the Bank had $10,000,000 and $6,000,000, respectively, available under a line of credit Fed Funds facility to be used for overnight cash settlements. The borrowings are secured by $500,000 held in a cash and correspondent account that is recorded as cash and due from banks on the balance sheets at December 31, 2016 and 2015. There were no borrowings on this line at December 31, 2016 and 2015. At December 31, 2016, the Bank had an unsecured uncommitted Fed Funds facility available in the amount of $10,000,000. Borrowings may not be outstanding for more than fourteen consecutive days followed by at least three business days with no usage. Interest is due daily on the outstanding balance of the facility each day based on the interest determined at the time of each advance. There were no borrowings on this line at December 31, 2016. On September 23, 2015, the Bank entered into an agreement with the FHLB for $2,000,000 advanced under a principal reducing credit facility. The agreement calls for semi-annual principal payments of $142,857 beginning March 23, 2016 and interest payments at 1.72 percent, and matures on September 23, 2022. The balance at December 31, 2016 and 2015 was $1,714,286 and $2,000,000, respectively. On November 16, 2015, the Bank entered into an additional agreement with the FHLB for $4,200,000 advanced under a fixed rate credit facility to be used for temporary, short-term needs. The agreement called for monthly interest payments at 0.28 percent and matured on February 18, 2016. The balance at December 31, 2015 was $4,200,000. On February 11, 2016, the Bank entered into an additional agreement with the FHLB for $3,000,000 advanced under a fixed rate credit facility. The agreement calls for monthly interest payments at 1.34 percent and matures on February 11, 2021. The balance at December 31, 2016 was $3,000,000. In December 2016, the Bank entered into four additional 30-day borrowing agreements with the FHLB totaling $39,000,000, advanced under the fixed rate credit facility for temporary, short-term needs. The agreements call for monthly interest payments at rates ranging from 0.49 percent to 0.64 percent and mature in January 2017. The balance at December 31, 2016 was $39,000,000. The principal reducing credit facility and the fixed rate credit facilities with the FHLB are secured by certain residential and commercial mortgages. For the years ended December 31, 2016, 2015 and 2014, interest expense on the borrowings was $119,910, $10,930 and $-0-, respectively. 21 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIAPrincipal maturities by year are as follows: 2017 2018 2019 2020 2021 Thereafter TOTAL $ 39,285,714 285,714 285,714 285,714 3,285,714 285,716 $ 43,714,286 8. INCOME TAXES Significant components of deferred income tax assets and liabilities are as follows at December 31: DEFERRED SOURCE Loans and Loan Loss Reserve Unearned Loan Fees and Costs, Net Depreciation Gross Deferred Tax Assets Valuation Allowance Net Deferred Tax Assets 2016 $ 1,905,000 2015 $ 1,534,000 2014 $ 1,305,000 352,600 (366,000) 261,000 (191,000) 234,000 (219,000) 1,891,600 1,604,000 1,320,000 — — — $ 1,891,600 $ 1,604,000 $ 1,320,000 The provision for income taxes consists of the following at December 31: Current Tax Expense Deferred (Benefit) Tax Expense Change in Valuation Allowance 2016 $ 1,700,000 2015 $1,169,000 (287,600) (284,000) — — 2014 $461,000 82,000 (543,000) $ 1,412,400 $ 885,000 $ — 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 2016 34% — — 34% 2015 34% — — 34% 2014 34% — (34) 0% 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. 22 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIA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 as of January 1, 2015, of total capital, Tier 1 capital and common equity Tier 1 capital to risk-weighted assets (as defined in the regulations), and Tier 1 capital to adjusted average total assets (as defined). Prior to January 1, 2015, minimum amounts and ratios of total capital, Tier 1 capital and Tier 1 capital to adjusted average total assets (as defined), were required. Management believes, as of December 31, 2016, 2015 and 2014, that the Bank meets all the capital adequacy requirements to which it is subject. As of December 31, 2016, 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, 2016 and 2015 are as follows: DEC. 31, 2016 Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Common Equity Tier 1 (to Risk Weighted Assets) Tier 1 Capital (to Adjusted Average Assets) DEC. 31, 2015 Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Common Equity Tier 1 (to Risk Weighted Assets) Tier 1 Capital (to Adjusted Average Assets) ACTUAL FOR CAPITAL ADEQUACY PURPOSES MINIMUM TO BE WELL CAPITALIZED UNDER ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO $51,656,614 12.20% $33,870,240 8.00% $42,337,800 10.00% $52,144,993 12.32% $25,402,680 6.00% $33,870,240 8.00% $52,144,993 12.32% $19,052,010 4.50% $27,519,570 6.50% $52,144,993 14.10% $14,791,180 4.00% $18,488,975 5.00% $42,580,925 13.03% $26,138,400 8.00% $32,673,000 10.00% $42,892,618 13.13% $19,603,800 6.00% $26,138,400 8.00% $42,892,618 13.13% $14,702,850 4.50% $21,237,450 6.50% $42,892,618 11.60% $14,791,180 4.00% $18,488,975 5.00% 10. STOCK OPTION PLAN In 2007, the Bank established the 2007 stock option and equity plan (the Plan) for executives, other employees, officers, directors and consultants. Shares under the Plan may be granted at not less than 100 percent of the fair market value at the grant date. The shareholders approved increasing the number of authorized shares by 200,000 at the March 2016 annual meeting. The authorized and granted options under the Plan are as follows at December 31, 2016: 2007 Plan AUTHORIZED GRANTED 833,600 665,135 VESTED 524,445 23 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIA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, 2016, there was approximately $4,000 in unrecognized compensation expense related to non-vested share-based compensation. At December 31, 2015, there was approximately $24,000 in unrecognized compensation expense related to non-vested share-based compensation. At December 31, 2014, there was approximately $58,000 in unrecognized compensation expense related to non-vested share-based compensation. Amounts and the number of options have been retrospectively adjusted for the eleven-for-ten stock split that was effective on April 1, 2014. The Bank canceled and reissued stock options granted in 2007. The following summarizes the option activity under the Plan: NUMBER OF SHARES OPTION PRICE PER SHARE WEIGHTED AVERAGE EXERCISE PRICE OUTSTANDING (DEC. 31, 2013) Grants Exercised Canceled or Expired OUTSTANDING (DEC. 31, 2014) Grants Exercised Canceled or Expired OUTSTANDING (DEC. 31, 2015) Grants Exercised Canceled or Expired OUTSTANDING (DEC. 31, 2016) 458,602 96,275 (23,260) (1,584) 530,033 32,500 (9,212) (550) 552,771 134,500 (4,752) (17,384) $ 6.50 $ 6.50 8.99 6.03 6.27 6.97 8.14 6.50 9.09 7.04 8.29 6.27 8.45 8.99 6.03 6.27 6.97 8.14 6.50 9.09 7.04 8.29 6.27 8.45 665,135 $ 7.27 $ 7.27 The weighted average fair value of options granted during the year ended December 31, 2016 was $8.29. The weighted average remaining contractual life of options outstanding as of December 31, 2016 is 6.13 years. Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense on a straight-line basis over the requisite service period, which is the vesting period. The Bank uses the Black-Scholes option pricing model to determine the fair value of stock options. The fair value of the stock based payment awards is affected by the price of the stock and a number of financial assumptions and variables. These variables include the risk-free interest rate, expected dividend rate, expected stock price volatility and the expected life of the options. The following assumptions were used: a risk-free interest rate of 3.25 percent, an estimated dividend yield of zero percent, an expected holding period of 10 years and volatility of 5.00 percent. The expected volatility is based on the historical volatility of peer institutions. The risk-free interest rate is the implied yield available on U.S. Treasury bonds with a remaining term equal to the expected term of the options granted. The expected life is based on the average of the contracted life and vesting schedule for the options granted. The dividend yield assumption is based on expected dividend payouts. For the years ended December 31, 2016, 2015 and 2014, the Bank recognized approximately $114,000, $55,000 and $8,000 in stock-based compensation expense, respectively. 11. OPERATING LEASES In December 2015, the Bank exercised its third 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 2020. The total base annual lease payments for the base year of the third extension are $85,223, increasing a maximum of five percent per annum thereafter. The lease agreement 24 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIAincludes approximately 1,862 square feet on the ground floor for the branch facility. The lease agreement includes additional rent payments based on a pro rata portion of annual taxes and common area maintenance charges. In October 2004, the Bank entered into a lease for its headquarters and an additional branch facility at 10555 Main Street in Fairfax, Virginia. The agreement provided for an initial lease term of ten years commencing January 1, 2005 and ending December 31, 2014. In December 2014, the Bank entered into an updated agreement that separated the headquarters and branch space. The headquarters space lease for 2,405 square feet was extended for an additional year ending December 31, 2015. Total base annual payments under the one-year extension are $225,855 for both the headquarters and branch space. The lease for this space was again extended through October 31, 2016, at which point the space was vacated. Monthly lease payments under the extension were $7,015. The agreement included additional rent payments based on a pro rata portion of annual taxes, common area maintenance charges, and utilities. The updated lease agreement for the branch is for an initial lease term of ten years commencing January 1, 2016 and ending December 31, 2025. Total base annual lease payments are $125,895 for the first year, increasing 3 percent per annum thereafter. The agreement includes additional rent payments based on a pro rata portion of annual taxes, common area maintenance charges, and utilities. The Bank has the right to renew the branch lease for two periods of five additional years as provided for in the lease. The lease agreement for the branch space is for 3,597 square feet. 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 provided for an initial lease term of 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. In December 2014, the Bank entered into an updated agreement amending the lease to end on December 31, 2015. The lease agreement was for 6,072 square feet. The agreement included additional rent payments based on a pro rata portion of annual taxes, common area maintenance charges, and utilities. In September 2015, the Bank entered into a new lease agreement for suites on the second and sixth floors at 10555 Main Street in Fairfax, Virginia. The agreement provides for an initial lease term of eight years commencing January 1, 2016 and ending December 31, 2023. Total base annual lease payments are $352,806 for the first year, increasing three percent per annum thereafter. The lease agreement is for 13,189 square feet. The agreement includes the option to renew the lease for two periods of five additional years at the then 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 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. In February 2015, the Bank entered into a sub-lease agreement for office space in Chantilly, Virginia. The agreement provides for an initial lease term of two years commencing March 1, 2015 through February 28, 2017. Total base annual payments are $64,875 for 4,055 square feet. In June 2016, the Bank entered into a lease agreement for a single office space in Ruther Glen, Virginia. The agreement provides for an initial lease term of one year commencing July 1, 2016 through June 31, 2017. Total base annual payments are $17,400. The following are the future minimum lease payments at December 31, 2016: YEARS ENDING DECEMBER 31 2017 2018 2019 2020 2021 Thereafter $ 685,162 685,467 706,260 727,754 641,205 1,688,715 $ 5,134,563 Rent expense amounted to $842,487, $712,063 and $530,626 for the years ended December 31, 2016, 2015 and 2014, respectively. 25 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIA12. FAIR VALUE MEASUREMENTS FASB 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: 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 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: 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: QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) FAIR VALUE 2016 Available-for-Sale Securities $ 29,074,040 $ — $ 29,074,040 $ — 2015 Available-for-Sale Securities $ 46,315,581 $ — $ 46,315,581 $ — 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. 26 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIAThe following describes the valuation techniques used by the Bank to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements: IMPAIRED LOANS: Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral. Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or business assets, including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is a house or building in the process of construction, or if an appraisal of the real estate property is over two years old, then the fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or the net book value on the applicable business’ financial statements if not considered significant using observable market data. Likewise, values for inventory and accounts receivable 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: QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) FAIR VALUE 2016 Impaired Loans $ 2,146,144 $ — $ 2,146,144 $ — 2015 Impaired Loans $ 2,042,669 $ — $ 2,042,669 $ — 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, consisting of money market deposits, Federal Reserve Bank and Federal Home Loan Bank accounts, approximates 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. 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 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 27 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIAanalyses using the remaining maturity of the underlying accounts and interest rates currently offered on certificates of deposit with similar original maturities. Federal Home Loan Bank advances: The fair value of the Federal Home Loan Bank advances is determined using rates currently available to the Bank for debt with similar terms and remaining maturities. Off-balance sheet financial instruments: At December 31, 2016 and 2015, 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: 2016 2015 CARRYING AMOUNT FAIR VALUE CARRYING AMOUNT FAIR VALUE Financial Assets Cash and Due from Banks $ 1,251,102 $ 1,251,102 $ 1,266,818 $ 1,266,818 Interest Bearing Deposits with Banks 4,358,332 4,358,332 5,617,821 5,617,821 Federal Funds Sold 24,108,000 24,108,000 15,000,000 15,000,000 Securities Available-for-Sale 29,074,040 29,074,040 46,315,581 46,315,581 Loans Held for Sale 15,035,844 14,258,168 — — Securities Held-to-Maturity 7,488,194 7,488,194 7,634,844 7,634,844 Loans Receivable, net 402,941,879 401,871,989 315,936,190 314,624,624 Accrued Interest Receivable Bank-owned Life Insurance 1,351,819 1,351,819 963,995 963,995 2,281,726 2,281,726 2,221,695 2,221,695 TOTAL FINANCIAL ASSETS $ 487,890,936 $ 486,043,370 $ 394,956,944 $ 393,645,378 Financial Liabilities Non-interest Bearing Deposits $ 62,941,221 $ 62,941,221 $ 51,849,383 $ 51,849,383 Interest Bearing Deposits 114,549,659 114,549,659 88,182,669 88,182,669 Saving Deposits 2,921,102 2,921,102 2,573,038 2,573,038 Federal Home Loan Bank Advances 43,714,286 43,714,286 6,200,000 6,200,000 Time Deposits 218,980,247 219,914,252 206,959,651 207,858,044 Accrued Interest Payable 175,072 175,072 97,216 97,216 TOTAL FINANCIAL LIABILITIES $ 443,281,587 $ 444,215,592 $ 355,861,957 $ 356,760,350 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 28 2016 $ 99,651,000 2015 $ 83,372,000 $ 1,596,000 $ 1,709,000 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIACommitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property and equipment, and income- producing commercial properties. Standby letters of credit are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. The Bank has not been required to perform on any financial guarantees during the past three years. The Bank has not incurred any losses on its commitments in 2016, 2015 or 2014. 14. RESTRICTION ON DIVIDENDS The Bank, as a state-chartered bank, is subject to the dividend restrictions established by the State Corporation Commission of the Commonwealth of Virginia. Under such restrictions, the Bank is limited on the amount of dividends that it may pay without prior regulatory approval. 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 approximately $193,000, $193,000, and $140,700 for each of the years ended December 31, 2016, 2015 and 2014, 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 a 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. 29 FINANCIAL STATEMENTSFREEDOM BANK OF VIRGINIASHAREHOLDER & COMPANY INFORMATION BOARD OF DIRECTORS RICHARD C. LITMAN Chairman JOHN T. ROHRBACK Vice Chairman CYNTHIA CARTER ATWATER Corporate Secretary G. THOMAS COLLINS, JR. TERRY L. COLLINS, Ph.D. ROBERT FALESE, JR. H. JASON GOLD NORMAN P. HORN DAVID C. KARLGAARD, Ph.D ALVIN E. NASHMAN, Ph.D CRAIG S. UNDERHILL President & Chief Executive Officer 30 FREEDOM BANK OF VIRGINIADIRECTORS EMERITUS With Deepest Appreciation for the Directors Who Previously Served IRVING BERNSTEIN Founding Director 2000-2007 In Memoriam RICHARD L. HALL Founding Director, President, & COO 2000-2003 In Memoriam RUSSELL E. SHERMAN Founding Director 2000-2007 In Memoriam JOHN F. CARMAN Founding Director & Vice Chairman 2000-2006 In Memoriam TIMOTHY P. HECHT Director 2005-2007 Director Emeritus GEORGE C. DUKAS Director 2002-2005 Director Emeritus WILLIAM G. DUKAS Founding Director 2000-2011 In Memoriam MICHAEL A. FALKE Founding Director 2000-2002 ADVISORY BOARD GEORGE Z. KONTZIAS Director 2002-2006 Director Emeritus MICHAEL A. MIRANDA Co-Founder & Organizing Director 2000-2013 In Memoriam JAMES N. NEWSOME Founding Chairman & CEO 2000-2003 Director Emeritus 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 AZMAT ALI OWEN MICHAEL MCCALL JAMES F. STEFFEY DARREN BERNSTEIN USAMA H. MISLEH FRANK V. STURGEON BRIAN BLOXOM PHILIP DONDES BRYAN FELDER ELIZABETH J. MOFFETT C. STEPHEN TEMPLETON JAMES N. NEWSOME ROBERT G. WILLIAMS ARLENE LYLES PRIPETON CHARLES M. WRIGHT JARED JABLONKA THOMAS J. RILEY 31 SHAREHOLDERS & COMPANY INFORMATIONEXECUTIVE OFFICERS & SENIOR LEADERSHIP TEAM CRAIG S. UNDERHILL President & Chief Executive Officer C. KEVIN CURTIS Executive Vice President Chief Lending Officer NMLS# 1040247 KARIN M. JOHNS Executive Vice President Chief Accounting Officer KENDRA MCKEE Vice President Human Resources RICHARD A. HUTCHISON Executive Vice President Chief Mortgage Officer NMLS# 179316 SALLY T. SIVERONI Executive Vice President Chief Credit Officer DEBORAH A. FREE Senior Vice President Branch Administration DANIEL E. BURNETT, CPA Executive Vice President Chief Financial Officer ROBERT D. WILLEY, JR. Executive Vice President Commercial Banking KIMBERLY J. RYMAN Senior Vice President Compliance COMMERCIAL BANKING MICHAEL J. UNDERWOOD Senior Vice President and Team Leader EDWARD W. LULL, JR. Senior Vice President ANGELA GANSOR Vice President Business Development Officer NMLS # 431133 DANIEL E. MARKS Vice President NMLS# 618696 VISHAL M. GANDHI Senior Vice President and Team Leader JAMES T. NELSON, III Senior Vice President DARREN T. TULLY Vice President NMLS# 1066465 E. ROBERT MUSSEMAN, JR. Vice President NMLS# 85152 STEPHEN A. WITT Senior Vice President NMLS# 1442969 RICHARD M. SOBONYA Senior Vice President NMLS# 1442500 32 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIACHRISTOPHER PERSIL Senior Mortgage Loan Officer NMLS# 188099 BONNIE L. ZAPF Senior Mortgage Loan Officer NMLS# 188572 MORTGAGE LOAN OFFICERS (CHANTILLY) KIM-ANN H. CYBULSKI Senior Mortgage Loan Officer NMLS# 188605 CHARLES G. HUTCHISON Mortgage Loan Officer NMLS# 1019699 KEVIN P. DENNIS Senior Mortgage Loan Officer NMLS# 185900 STEFAN GOLDFADEN Senior Mortgage Loan Officer NMLS# 886220 SCOTT HILL Senior Mortgage Loan Officer NMLS# 187713 CHRISTINE S. KERN Senior Mortgage Loan Officer NMLS# 970512 PAIGE LUTZ Senior Mortgage Loan Officer NMLS# 1052568 STEVEN L. MITCHELL Senior Mortgage Loan Officer NMLS# 888275 MORTGAGE LOAN OFFICERS (FAIRFAX) GEORGE J. DECKER Senior Mortgage Loan Officer NMLS# 525099 ANGELA GANSOR Mortgage Loan Officer NMLS# 431133 BRANCH LOCATIONS FAIRFAX SALMA SUFI Vice President/Branch Manager NMLS# 1504176 RESTON ALFREDO G. MOLINA Assistant Vice President/ Branch Manager NMLS# 1306195 VIENNA PAULA A. NEWSOME Vice President/Branch Manager NMLS# 993276 FBV CAPITAL ADVISORS, INC. A subsidiary of The Freedom Bank of Virginia ROBERT N. RUBIN President 33 SHAREHOLDERS & COMPANY INFORMATIONFREEDOM BANK OF VIRGINIACORPORATE HEADQUARTERS The Freedom Bank of Virginia 10555 Main Street Fairfax, VA 22030 703-242-5300 TRANSFER AGENT American Stock Transfer & Trust Company Shareholder Services – Admin 2 Team 6201 Fifteenth Avenue Brooklyn, NY 11219 800-937-5449 www.amstock.com INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Thompson Greenspon Fairfax, VA COMMON STOCK The Freedom Bank of Virginia Common stock is traded on the OTC Markets Group (OTCQX) under the symbol FDVA NOTICE OF ANNUAL MEETING The Annual Meeting of Shareholders will be held on Tuesday, June 20, 2017 – 10:00 a.m. at the Westwood Country Club 800 Maple Avenue East Vienna, VA 22180 34 2016 ANNUAL REPORTFREEDOM BANK OF VIRGINIAVIENNA RESTON FAIRFAX 502 Maple Avenue W. Vienna, VA 22180 11700 Plaza America Drive Reston, VA 22190 10555 Main Street Fairfax, VA 22030 703-667-4170 703-663-2300 703-242-5300 MORTGAGE DIVISION 4211 Pleasant Valley Road Chantilly, VA 20151 703-766-6400 OTCQX : FDVA 

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