2017
ANNUAL REPORT
ABOUTTHE BANK
We’re an independent, locally-owned bank that’s all about getting it
right—for you. Whatever your needs, we provide every financial tool
your nearby national and regional banks offer.
But we provide them differently. Very noticeably differently.
How? Because we’ve been serving our part of Northern Virginia for a
long time. Same team, with over 200 years of combined experience
and connections.
Long-standing bonds of trust and our local contacts, combined with our
unencumbered, small-bank agility, mean we get it right for you fast, and tailored
to your needs. No formulas, no big-bank rules, no distant decision makers who are
miles and days away. Our decision makers are your neighbors. Right here.
FINANCIAL HIGHLIGHTS
ASSET GROWTH
Growth (%)
15%
15%
25%
17%
24%
7%
600
500
400
300
200
100
0
CAGR: 14%
$533
$496
$400
$343
$274
$239
2012
2013
2014
2015
2016
2017
Assets ($mm)
NON INTEREST BEARING DEPOSITS GROWTH
INTEREST BEARING DEPOSITS GROWTH
Growth (%)
40%
12%
32%
0.8%
21%
11%
Growth (%)
-12%
29%
39%
34%
30%
61%
70
60
50
40
30
20
10
0
$70
$63
CAGR: 12%
$51
$52
$39
$35
CAGR: 31%
$184
$115
$88
$66
$37
$47
200
150
100
50
0
2012
2013
2014
2015
2016
2017
2012
2013
2014
2015
2016
2017
Rounded ($mm)
Rounded ($mm)
TABLE OF CONTENTS
2/
INDEPENDENT AUDITOR’S REPORT
4/
LETTER TO OUR SHAREHOLDERS
7/
BUSINESS BANKING
8/
PERSONAL BANKING
9/
COMMUNITY ENGAGEMENT
10/
FINANCIAL STATEMENTS
10/
12/
13/
14/
15/
17/
BALANCE SHEETS
STATEMENTS OF OPERATIONS
STATEMENTS OF COMPREHENSIVE INCOME
STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
STATEMENTS OF CASH FLOWS
NOTES TO FINANCIAL STATEMENTS
41/
SHAREHOLDER & COMPANY INFORMATION
INDEPENDENT AUDITOR’S REPORT
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the shareholders and the board of directors of Freedom Bank of Virginia
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheet of Freedom Bank of Virginia and subsidiary
(the “Company”) as of December 31, 2017, and the related consolidated statement of operations,
comprehensive income, stockholders’ equity and cash flows for the year ended December 31, 2017, and the
related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements
referred to above present fairly, in all material respects, the financial position of the Company as of December
31, 2017, and the results of their operations and their cash flows for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
BASIS FOR OPINION
These financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on the Company’s financial statements based on our audit. We are a public accounting firm
registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required
to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB 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 whether due to error or fraud. The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting. As part of our audit we are required to obtain
an understanding of internal control over financial reporting but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no
such opinion.
Our audit included performing procedures to assess the risks of material misstatement of the financial
statements, whether due to error or fraud, and performing procedures that respond to those risks. Such
procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the
financial statements. Our audit also included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall presentation of the financial statements.
We believe that our audit provide a reasonable basis for our opinion.
EMPHASIS OF MATTER
As discussed in Note 1 to the consolidated financial statements, the Company restated its 2016 financial
statements to correct errors related to other assets, deferred loan costs, stock option expense and deferred
taxes. Our opinion is not modified with respect to this matter.
The consolidated financial statements of Freedom Bank of Virginia as of December 31, 2016, were audited
by other auditors whose report dated March 15, 2017, expressed an unmodified opinion on those financial
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statements. As discussed in Note 1 to the financial statements, the Company has restated its 2016 financial
statements to correct the errors related to other assets, deferred loan costs, stock option expense and deferred
taxes. The other auditors reported on the 2016 financial statements before the restatement.
As part of our audit of the 2017 financial statements, we also audited the adjustments described in Note 1
that were applied to restate the 2016 financial statements. In our opinion, such adjustments are appropriate
and have been properly applied. We were not engaged to audit, review, or apply any procedures to Freedom
Bank of Virginia and Subsidiary’s 2016 financial statements other than with respect to the adjustments and,
accordingly, we do not express an opinion or any other form of assurance on the 2016 financial statements as
a whole.
We have served as the Company’s auditor since 2017.
Gaithersburg, Maryland
May 8, 2018
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A LETTER TO OUR SHAREHOLDERS
Dear Shareholder,
On behalf of the board of directors and management of the Freedom Bank of Virginia (OTCQX: FDVA), (the
“Company” or “Freedom”) we are pleased to provide you with Freedom’s 2017 annual report. Changes in the
local banking market allowed us to recruit outstanding individuals to our senior management team. Raj Mehra,
our new Chief Financial Officer, came to us in December of 2017 from Middleburg Financial Corporation, a
$1.4 billion publicly traded bank holding company, where he had been Chief Financial Officer since 2009.
Kathleen Croson, also a veteran of Middleburg Bank, joined in January 2018 as our Chief Banking Officer.
Kathleen oversees all of our retail banking operation. And we are pleased to note that shortly before year-end
we opened our fourth branch office at 4500 Daly Drive Suite 240, Chantilly, VA 20151 on December 29, 2017.
Recently there was another important change: On July 17, 2018 the Company announced that H. Jason Gold,
a founding and the longest serving director, was elected Chairman of the Board of Directors. He succeeded
Richard Litman, who retired as Chairman after eleven years in that role. We are pleased that Mr. Litman
continues to serve as a director.
FINANCIAL HIGHLIGHTS FOR 2017
• Net income was $2.69 million, or $0.39 per diluted share for the full year 2017, compared to net income of
$2.65 million (as restated) or $0.41 per diluted share for the full year 2016.
• Excluding a one-time tax adjustment of $603,331 related to the Tax Cuts and Jobs Act of 2017, non-GAAP
adjusted net income for 2017 was $3.30 million, or $0.48 per diluted share;
• Total assets were $533.1 million at December 31, 2017, an increase of $36.2 million or 7.3% from the
previous year;
• Available-for-sale securities increased by $32.9 million in 2017, as the Company increased its on-balance
sheet liquidity;
• Loans receivable were flat in 2017 compared to 2016, as payoffs offset new loan originations;
• Deposits grew by $66.6 million during the year or 16.67% to $465.9 million at December 31, 2017, with the
growth occurring in demand deposits. Time deposits declined in 2017 as the Company made the decision to
reduce brokered certificates of deposits by $24 million;
• Federal Home Loan Bank advances declined by $33.3 million or 76.14% in 2017, as the Company paid off
wholesale borrowings; and
• Capital ratios were strong in 2017, and above regulatory minimums for well-capitalized banks, with increases
in the Common Equity Tier 1 Capital ratio, the Tier 1 Capital ratio (based on risk weighted assets), and the
Total Capital ratio, compared to 2016.
The Company also restated certain amounts in the December 31, 2016 and 2015 balance sheets and the 2016
statement of operations to correct errors related to accounting for stock compensation expense, deferred loan
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origination costs, interest rate lock commitments and deferred income taxes. The net effect of the correction
of these errors was an increase to stockholders’ equity for both 2015 and 2016.
The Company has consistently grown average loan balances over the past few years, with an increased
concentration in commercial real estate (CRE) loans. In 2017, the Company diversified its loan portfolio by
emphasizing other types of loans resulting in a decrease in CRE concentration (as measured by CRE loans
relative to total capital) to 229% on December 31, 2017 from 301% on December 31, 2016.
TOTAL REVENUE
Interest income was $23.13 million in 2017, compared to $20.51 million in 2016, an increase of 12.8%,
primarily due to higher interest income from loans. Interest expense was $5 million in 2017, higher by $1.3
million compared to 2016, primarily due to an increase in interest-bearing deposits in 2017 as the Company
increased on-balance sheet liquidity during the year. Net interest income (before a provision for loan losses)
was $18.13 million in 2017, higher by $1.3 million compared to 2016, or an increase of 7.8%.
NON-INTEREST INCOME
Non-interest income in 2017 was $4.64 million, compared to $5.26 million in 2016 (as restated), a decline of
11.9%, primarily due to lower gain-on-sale of mortgage loans. Total revenue (comprising net interest income
and non-interest income) was $22.77 million in 2017.
NON-INTEREST EXPENSE
Non-interest expense for 2017 was $17.65 million, higher by 3.5% compared to 2016, primarily due to an
increase in fees paid for professional services during 2017 and higher franchise taxes. Compensation expenses
were flat during the year. Occupancy expenses increased slightly as the Company opened a banking center in
Chantilly, Virginia, during the fourth quarter of 2017.
ASSET QUALITY
Asset quality continued to be strong with total non-performing assets of $666,125 or 0.12% of total assets as
of December 31, 2017, compared to $396,341 or 0.08% of total assets at December 31, 2016.
All of the non-performing loans in 2017 and 2016 were non-accrual loans. Consequently, non-accrual loans
were $666,125 or 0.16% of total loans as of December 31, 2017, compared to $396,341 or 0.10% of total
loans as of December 31, 2016. The Company’s allowance for loan and lease losses (“ALLL”) was $4.56 million
or 1.12% of total loans at December 31, 2017, compared to $4.15 million or 1.02% of total loans at December
31, 2016. The Company experienced increased loss recoveries in 2017 and flat loan growth, which resulted in a
modest $30,000 provision for loan losses in 2017, compared to a provision of $1.09 million in the prior year.
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TOTAL ASSETS
Total assets at December 31, 2017 were $533.1 million, compared to $496.9 million at December 31, 2016 (as
restated), an increase of $36.2 million during the year. Changes in major asset categories were as follows:
Cash balances and deposits with other banks increased by $29.5 million compared to December 31, 2016,
and Fed Funds sold decreased by $24 million. Available-for-sale securities balances increased by $32.9 million
compared to December 31, 2016, as the Company built up on-balance sheet liquidity.
TOTAL LIABILITIES
Total liabilities at December 31, 2017 were $477.8 million, an increase of $32.9 million compared to December
31, 2016. Deposits grew by $66.6 million for the full year to $466 million as of December 31, 2017. Demand
deposits increased by $76.7 million, offset by declines in savings and time deposits. The decrease in time
deposits resulted from the Company’s decision to pay off maturing brokered certificates of deposits.
Federal Home Loan Bank (“FHLB”) advances decreased by $33.3 million as the Company paid off wholesale
borrowings.
SHAREHOLDERS’ EQUITY AND CAPITAL
Shareholders’ equity at December 31, 2017 was $55.3 million, compared to $52.0 million at December 31, 2016
(as restated). Additional paid in capital at December 31, 2017 was $53.2 million compared to $48.7 million at
December 31, 2016 (as restated), primarily due to a 5% stock dividend that was declared on May 29, 2017,
which increased the number of common shares outstanding by 310,424. The book value of the Company’s
common stock at December 31, 2017 was $8.47 per share versus $8.42 per share at December 31, 2016.
We thank you for your continued support of Freedom Bank.
CRAIG S. UNDERHILL
President & CEO
H. JASON GOLD
Chairman of the Board
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BUSINESS BANKING
We understand the unique needs of businesses. You need a long-term, strategic financial partner to help your
business grow, allow you to serve your clients more effectively and efficiently, and maximize profit and cash
flow. We understand how the right banking products and services can make an important difference to your
bottom line.
We have a proven track record of partnering with local businesses for over 15 years to help you achieve your
financial goals. Many of Freedom Bank’s board members and management team have specific expertise,
offering you a wealth of industry knowledge.
MEET YOUR FINANCIAL NEEDS
Our business banking team excels in offering clients flexibility, customized products and services, and access
through our branches and Freedom Direct, our online banking platform for businesses. Whether it is depository,
lending, or treasury management services, we offer convenience and options to help maximize cash flow.
FOCUS ON YOUR BUSINESS
We know growing your business is what matters most to you, so your dedicated Relationship Manager is here
for you with trusted advice, quick decisions, and tailored solutions. You get to focus on doing what you do
best: running your business.
BANK YOUR WAY
Whether it’s in person at one of our four locations, online at your convenience, or face-to-face at your place of
business, we’re here as your partner to help you achieve your financial goals.
GOVCON PREMIER
BENEFITS
• Flexibility
• Customization
• Accessibility
TREASURY
SERVICES
• Online Banking
• Cash Flow Management
• Operating Efficiency
PRODUCTS & SERVICES
Commercial Lending
• Business Installment Loans
• Commercial Lines of Credit
• Commercial Real Estate
Mortgages
GovCon Premier Services
• Working Capital Lines of Credit
• Asset Based Loans
• Mezzanine Financing
• Financial Capability Letters
• Small Business Administration
& Support
(SBA) Loans
• Equipment Financing
• M&A Advisory Services
Treasury Management
• Online Business Banking
• Mobile Banking
• Remote Deposit Capture
• ACH Origination
• Domestic and Foreign Wire
Transfer Services
• Merchant Bankcard Services
• ACH Block and Filter
• Positive Pay Check &
ACH Processing
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PERSONAL BANKING
We were founded on meeting your personal banking needs and believe strongly in building relationships with
our clients and the communities we serve. Combining small-bank agility with a big-bank menu of products
and services, we provide solutions to meet your financial needs.
We are committed to giving back to the communities we serve, and
we’re proud of the fact that our bank and its team members have
contributed time and resources to a wide variety of worthy causes.
LOCAL TEAM MEMBERS
We’re not just a company in a community. We’re members of the
community, too. Many of our team members live in the areas we
serve, and we understand the unique needs of those living in the
northern Virginia areas, allowing us to create solutions that help you
reach your goals.
YYYY
Y Y
.
Serving you and
our community.
This is your bank. We listen to
you and then tailor our services
and products to meet your needs
and provide what’s important to
you. At Freedom Bank, we have
our priorities right — you come
first. Visit us online or stop in a
brbranch today to see how we can
personally help you.
COMPREHENSIVE PRODUCTS & SERVICES
Fairfax. Vienna. Reston. Chantilly. FreedomBankVA.com
In addition to a wide variety of standard bank products and services,
which include checking and savings accounts, we also offer many others such as mortgages, HELOCs, personal
loans, CDs, IRA investments, and credit cards. And, through our FBV Personal Mobile App, you’re able to enjoy
the convenience of banking on the go, on your schedule, from just about anywhere, anytime.
ATTENTIVE SERVICE
We provide you with outstanding service that is attentive to your unique needs. Our team will get to know you
and your family and will offer solutions to help you achieve long-term financial security and flexibility.
WHY WE'RE
UNIQUE
• Relationships
• Convenience
• Giving Back
Far left: Freedom Bank’s Chantilly Market Team comprised of Salam Alsaad, Assistant Branch Manager; Brendon Murphy, Mortgage Loan Officer,
Freedom Bank Mortgage; Terrell Monroe, Client Service Representative; Edward W. Lull, Jr., Senior Vice President, Commercial Banking; and Derege
Denu, Vice President, Branch Manager, Freedom Bank.
Far right: Freedom Bank celebrated the grand opening of our newest location at 4500 Daly Drive, Suite 240 in Chantilly, VA, in May of 2018. Our guests
included John Boylan, President & CEO, Dulles Regional Chamber of Commerce; Kathy Smith, Sully District Supervisor, Fairfax County; Craig S. Underhill,
President & CEO, Freedom Bank; Derege Denu, Vice President, Branch Manager; and Alan Fogg, Vice President, Communications and Research Fairfax
County, Economic Development Authority.
PRODUCTS & SERVICES
• Checking, Savings, & Money
Market Accounts
• Certificates of Deposit
• IRA Investments
• Mortgage Loans
• Personal Loans
• Online Banking and Bill Payment
• Mobile Banking &
Mobile Deposits
• EMV Chip Debit Cards
• Credit Cards
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COMMUNITYENGAGEMENT
As a local community bank with deep roots to area families and businesses, 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 clients, our neighbors, and our communities succeed.
HIGHLIGHTS OF OUR COMMUNITY INVOLVEMENT
• 15 Freedom Bank Employees participated in the Feed My Starving Children MobilePack at New Hope Church
in Lorton, VA in April 2017 to pack meals for needy children and their families across the globe. Freedom
Bank employees, alongside other volunteers, packed 225 boxes—totaling 48,600 meals to feed those in
need around the world.
• In the summer of 2017, Freedom Bank participated in Collect for Kids by holding a backpack drive in three
of our branches to help students in need obtain school supplies. The program ensures all Fairfax County
students have the supplies they need to have a successful school year.
• In addition to sponsoring Britepath’s Complete the Circle event, Freedom Bank hosted a food drive to
collect non-perishable food and household items during the month of October in our three branch lobbies.
Complete the Circle is a community event/service project to raise awareness and take a stand against hunger
in the Fairfax County area. The goal is to empower our neighbors who are struggling to move from a place
of need to financial self-sufficiency.
• Freedom Bank held a blood drive at its headquarters office in Fairfax, VA, in early November, to benefit
INOVA Blood Services. We attracted 39 donors, collection units, which means 81 lives were potentially saved.
• In June, six bank employees volunteered at a Title I Elementary School in Herndon, VA and taught 150
5th-grade students the importance of saving through hands-on exercises.
• In September, Kim Cybulski and Ed Lull of Freedom Bank participated in the Get Smart About Credit program
to work with our nation’s youth to instill sound money management skills. They spent time with 8th graders
simulating adult situations, touching on careers, families, salaries, a credit score, and financial obligations in
the fully digital, innovative, hands-on environment of Finance Park. They guided students through different
phases of the day, which mimic real-world budgeting decisions, spending research, and bill payment.
• During 2017, Freedom Bank continued to support Veterans Moving Forward through contributions for every
VA mortgage loan closed, purchased, or refinanced.
• Freedom Bank Mortgage sponsored RE/MAX Gateways’ Annual Breakfast with Santa that benefits Toys for
Tots, a program run by the United States Marine Corps Reserve which distributes toys to children whose
parents cannot afford to buy them gifts for Christmas.
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FINANCIAL STATEMENTS
BALANCE SHEETS
Years Ended December 31
2017 and 2016
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 Loan Losses
Net Loans
Bank Premises and Equipment, net
Accrued Interest Receivable
Deferred Tax Asset
Bank-Owned Life Insurance
Other Assets
TOTAL ASSETS
2017
$ 1,164,368
(As Restated
- Note 1)
2016
$ 1,251,102
33,936,870
4,358,332
127,000
24,108,000
61,989,669
29,074,040
14,869,181
15,035,844
2,533,500
7,772,501
3,718,400
7,488,194
407,332,772
407,564,141
(4,562,370)
(4,150,081)
402,770,402
403,414,060
1,595,575
1,643,427
974,614
2,338,146
1,407,079
1,438,880
1,351,819
2,288,271
2,281,726
1,078,706
$533,122,332
$496,887,374
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NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
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
Preferred stock, $0.01 par value, 5,000,000 shares authorized:
0 shares issued and outstanding, 2017 and 2016
Common stock, $0.01 par value, 25,000,000 shares:
23,000,000 shares voting and 2,000,000 shares non-voting
Voting Common Stock:
5,866,765 and 5,550,565 shares issued and outstanding
at December 31, 2017 and 2016, respectively
Non-Voting Common Stock:
660,143 and 628,707 shares issued and outstanding
at December 31, 2017 and 2016, respectively
Additional Paid-in Capital
Accumulated Other Comprehensive loss, net
Retained Earnings
Total Stockholders’ Equity
(As Restated
- Note 1)
2016
2017
$ 69,942,247
$ 62,941,221
184,271,412
114,549,659
2,273,760
2,921,102
209,493,201
218,980,247
465,980,620
399,392,229
10,428,571
43,714,286
1,256,202
162,749
1,598,943
175,072
477,828,142
444,880,530
—
—
58,668
55,506
6,601
6,287
53,241,342
48,708,431
(573,698)
(523,402)
2,561,277
3,760,022
55,294,190
52,006,844
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$ 533,122,332
$ 496,887,374
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
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STATEMENTS OF OPERATIONS
Years Ended December 31
2017 and 2016
INTEREST INCOME
Interest and Fees on Loans
Interest on Investment Securities
Interest on Federal Funds Sold
Total Interest Income
INTEREST EXPENSE
Interest on Deposits
Interest on Borrowings
Total Interest Expense
Net Interest Income
PROVISION FOR LOAN LOSSES
Net Interest Income After
Provision for Loan Losses
NON-INTEREST INCOME
Gain on Sale of Mortgage Loans
Service Charges and Other Income
Increase in Cash Surrender Value of
Bank-owned Life Insurance
Total Non-Interest Income
NON-INTEREST EXPENSES
2017
$21,117,267
(Restated)
2016
$19,327,206
1,993,655
1,174,707
19,922
9,338
23,130,844
20,511,251
4,831,359
172,206
5,003,565
3,581,426
119,910
3,701,336
18,127,279
16,809,915
30,000
1,090,500
18,097,279
15,719,415
4,314,314
269,071
4,982,058
223,616
56,420
60,031
4,639,805
5,265,705
Officers and Employee Compensation and Benefits
10,916,694
10,984,208
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 Non-Interest Expenses
Income Before Income Taxes
1,002,240
556,024
363,673
982,653
536,758
322,479
1,682,060
1,045,666
930,667
225,535
492,508
711,797
770,775
908,258
203,717
385,787
995,428
688,926
17,651,973
17,053,880
5,085,111
3,931,240
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
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INCOME TAX EXPENSE
NET INCOME
2017
(Restated)
2016
2,389,792
1,276,880
$ 2,695,319
$ 2,654,360
EARNINGS PER COMMON SHARE – BASIC
$ 0.41
$ 0.42
EARNINGS PER COMMON SHARE – DILUTED
$ 0.39
$ 0.41
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING – BASIC
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING – DILUTED
6,518,614
6,351,547
6,833,739
6,480,944
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2017 and 2016
Net Income
Other Comprehensive Income (Loss):
Unrealized holding gain (loss) on securities available-for-sale
arising during the year, net of taxes of ($27,347) and $64,799
in 2017 and 2016, respectively.
Gains on sales of securities available-for-sale, net of taxes of
$6,101 and $10,657 in 2017 and 2016, respectively.
Amortization of unrealized losses on securities transferred from
available-for-sale to held-to-maturity net of taxes of $1,477
and $248 in 2017 and 2016, respectively.
2017
$ 2,695,319
(Restated)
2016
$ 2,654,360
53,084
(125,786)
(11,842)
(20,686)
2,868
482
Total Other Comprehensive Income (Loss):
44,110
(145,990)
COMPREHENSIVE INCOME
$ 2,739,429
$ 2,508,370
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
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STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31
2017 and 2016
Voting and Non-Voting
SHARES OF
COMMON
STOCK
COMMON
STOCK
ADDITIONAL
PAID-IN
CAPITAL
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME (LOSS)
RETAINED
EARNINGS
(DEFICIT)
TOTAL
STOCKHOLDERS'
EQUITY
BALANCE, DEC. 31, 2015
AS PREVIOUSLY REPORTED
5,455,820
17,227,330 $ 24,282,805
$ (371,695) $ 1,442,485
$ 42,580,925
Restatement adjustment1
—
—
491,518
(5,717)
(336,823)
148,978
BALANCE, DEC. 31, 2015
AS RESTATED
5,455,820
17,227,330 $ 24,774,323
$ (377,412) $ 1,105,662
$ 42,729,903
Net Income (Restated)
—
—
—
Change in par value
— (17,172,772)
17,172,772
—
—
Other Comprehensive Loss
(Restated)
Stock Warrants Exercised
Stock Options Exercised
—
12,818
4,752
—
128
48
115,234
29,748
Sale of Common Stock
705,882
7,059
6,244,383
Stock-based Compensation
(Restated)
—
—
371,971
—
(145,990)
2,654,360
2,654,360
—
—
—
—
—
—
—
(145,990)
115,362
29,796
6,251,442
371,971
—
—
—
—
BALANCE, DEC. 31, 2016
6,179,272
61,793
48,708,431
$ (523,402)
3,760,022
52,006,844
Net Income
Other Comprehensive Income
Reclassification of stranded tax
effects from changes in tax rate
—
—
—
—
—
—
—
—
—
—
2,695,319
2,695,319
44,110
—
44,110
(94,406)
94,406
5% Stock Dividend
310,424
3,104
3,985,366
— (3,988,470)
Stock Warrants Exercised
Stock Options Exercised
Stock-based Compensation
28,463
8,749
—
285
255,882
87
—
65,826
225,837
—
—
—
—
—
—
—
—
256,167
65,913
225,837
BALANCE, DEC. 31, 2017
6,526,908
65,269 $ 53,241,342
$ (573,698) $ 2,561,277
$ 55,294,190
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1 December 31, 2015 and 2016 balances have been restated from previously reported results to correct for material and certain other
errors from prior periods. Refer to Note 1.
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
STATEMENTS OF CASH FLOWS
Years Ended December 31
2017 and 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income
Adjustments to reconcile net income to net cash provided by
operating activities:
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
Gain on Sale of Mortgage Loans
Loans Held for Sale Originated
Proceeds from the Sale of Loans Held for Sale
Stock-based Compensation Expense
Loss on Disposal of Equipment
Deferred Income Tax Expense (Benefit)
Increase in Cash Surrender Value of Bank-Owned Life Insurance
(Increase) Decrease In:
Accrued Interest Receivable
Other Assets
Increase (Decrease) In:
Other Accrued Expenses
Accrued Interest Payable
2017
(Restated)
2016
$ 2,695,319
$ 2,654,360
257,284
30,000
538,559
171,008
(17,943)
229,487
1,090,500
1,295,554
27,967
(31,343)
(4,314,314)
(4,982,058)
(161,044,213)
(178,909,688)
165,074,220
184,038,396
225,837
—
1,290,933
(56,420)
(291,608)
(328,372)
(342,741)
(12,323)
371,971
2,771
(428,263)
(60,031)
—
(387,824)
(42,079)
—
(395,694)
77,856
Net Cash Provided (Used) by Operating Activities
3,875,226
4,551,882
CASH FLOWS FROM INVESTING ACTIVITIES
Net Change in Federal Funds Sold
Net Change in Interest Bearing Deposits with Banks
Loan Originations and Payments, Net
Purchase of Available-for-Sale Securities
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
Acquisition of Bank Premises and Equipment
Net Cash (Used In) Investing Activities
23,981,000
(9,108,000)
(29,578,538)
1,259,489
613,658
(88,096,189)
(48,817,670)
(32,882,393)
6,411,284
9,032,629
7,551,912
26,022,799
(472,600)
(4,470,350)
1,657,500
2,354,500
(413,979)
(937,740)
(37,586,716)
(98,305,972)
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
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STATEMENTS OF CASH FLOWS
Years Ended December 31
2017 and 2016
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Deposits, net
2017
(Restated)
2016
66,588,391
49,827,488
Advances (Repayments) From Federal Home Loan Bank, net
(33,285,715)
37,514,286
Proceeds From Stock Options and Warrants Exercised
Proceeds From Sale of Stock, net
Net Cash Provided by Financing Activities
322,080
145,158
—
6,251,442
33,624,756
93,738,374
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS
(86,734)
(15,716)
CASH AND DUE FROM BANKS, BEGINNING OF YEAR
1,251,102
1,266,818
CASH AND DUE FROM BANKS, END OF YEAR
$ 1,164,368
$ 1,251,102
NONCASH INVESTING ACTIVITY
Unrealized (Loss) Gain on Securities Available-for-Sale, net
$ 66,833
$ (221,198)
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
Cash Paid During the Year for Interest
Cash Paid During the Year for Income Taxes
$ —
$ 94,741
$ 5,015,888
$ 3,503,570
$ 1,346,000
$ 1,628,000
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NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2017 AND 2016
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 along with a discussion of the restatement of the Bank’s prior year financial statements.
RESTATEMENT
Certain amounts in the Bank’s December 31, 2016 and 2015 balance sheets and in the Bank’s 2016 statement of operations
have been restated for the corrections of accounting errors related to interest rate lock commitments, deferred loan origination
costs, stock based compensation and deferred income taxes related to unrealized losses on securities available-for-sale
transferred to held-to-maturity. During 2017, the Bank determined that it did not properly record interest rate lock commitments
related to locked mortgage loans being held as of December 31, 2016 along with deferred loan origination costs. The initial
recording of interest rate lock commitments and deferred loan costs as of January 1, 2016 increased other assets and loans,
accordingly with an offsetting increase to retained earnings. The correction of the errors for 2016 activity related to the interest
rate lock commitments and deferred loan origination costs reduced other assets and gain on loans held for sale and increased
loans, interest and fees on loans and officer and employee compensation. Also, during 2017, the Bank determined that several
errors had been made in the calculation of stock based compensation. Historically the Bank has utilized the Black-Scholes
option pricing model to determine the fair value of stock options. The historical calculations were comprised of mathematical
errors along with errors in the key assumptions of the model. The net effect of the correction of these errors was an increase
to additional paid-in capital, an increase to stock based compensation and a decrease to retained earnings. The Bank also
determined that at December 31, 2016 the deferred tax asset related to the aforementioned transferred securities had not
been recorded. The correction of this error increased other assets and decreased accumulated other comprehensive loss. The
change to accumulated other comprehensive loss at December 31, 2015 resulted from the correction of the income tax rate
used to measure deferred tax assets at that date. The effects of the corrections of these errors on the Bank’s prior year financial
statements are summarized below:
AT DECEMBER 31, 2015:
Additional paid in capital
Accumulated other comprehensive loss
Retained earnings
Stockholders’ equity
AT DECEMBER 31, 2016:
Loans receivable
Deferred tax asset
Other assets
Total assets
Other accrued expenses
Additional paid in capital
Accumulated other comprehensive loss
Retained earnings
Stockholders’ equity
Previously
Reported
Amounts
Restated
Amounts
Effect of
Restatement
Increase (Decrease)
$ 24,282,805 $ 24,774,323
$ 491,518
(371,695)
(377,412)
1,442,485
1,105,662
42,580,925
42,729,903
(5,717)
(336,823)
148,978
$ 402,941,879 $ 403,414,060
$ 472,181
1,891,600
2,288,271
1,597,333
1,078,706
496,537,149
496,887,374
1,598,948
1,598,943
47,958,932
48,708,431
(548,380)
(523,402)
4,184,269
3,760,022
51,656,614
52,006,844
396,671
(518,627)
350,225
(5)
749,499
24,978
(424,247)
350,230
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YEAR ENDED DECEMBER 31, 2016:
Interest and fees on loans
Gain on sale of mortgage loans
Officer and employee compensation
Income before income taxes
Income tax expense
Net income
Earnings per common share - basic1
Earnings per common share - diluted1
Previously
Reported
Amounts
Restated
Amounts
Effect of
Restatement
Increase (Decrease)
$ 19,287,266 $ 19,327,206
$ 39,940
4,986,961
4,982,058
10,726,227
10,984,208
4,154,184
3,931,240
1,412,400
1,276,880
2,741,784
2,654,360
$0.43
0.42
$0.42
0.41
(4,903)
257,981
(222,944)
(135,520)
(87,424)
($0.01)
(0.01)
1 Retroactively restated for effects of the 5% stock dividend declared in 2017
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Freedom Bank of Virginia and its wholly-owned subsidiary,
FBV Capital Advisors Inc., a broker-dealer in securities, together referred to as “the Bank”. All intercompany balances and
transactions have been eliminated in consolidation. 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,
Reston, and Chantilly, 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 other institutions. 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 non-interest income 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.
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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.
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.
INTEREST RATE LOCK COMMITMENTS
The Bank enters into interest rate lock commitments (IRLCs) to originate residential mortgage loans for sale in the secondary
market whereby the interest rate on the loan is determined prior to funding. The period of time between issuance of a rate lock
commitment and closing and sale of the loan generally ranges from 15 to 75 days. The IRLCs with customers are considered
derivative financial instruments. The Bank recognizes derivative financial instruments at fair value as either an other asset or other
liability in the consolidated balance sheet. Because the IRLCs, are not designated as hedging instruments, adjustments to reflect
unrealized gains and losses resulting from changes in fair value of the IRLCs are reported as noninterest income or noninterest
expense, as applicable.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb probable 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
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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. The Bank amortizes software over three years using the
straight-line method.
Expenditures for maintenance, repairs and improvements under $1,000 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.
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 non-interest expense, 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, 2017 and 2016.
BANK-OWNED LIFE INSURANCE
The Bank has entered into bank-owned single premium life insurance policies 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
On May 29, 2017, the Bank declared a 5% stock dividend, effective for stockholders of record on June 23, 2017. All references
to share and per share amounts in the financial statements have been restated to reflect the stock dividend.
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.
The proceeds of the rights offering 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,
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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.
A valuation allowance is recorded if, based upon the evidence available, it is more likely than not some portion or all of the net
deferred tax assets will not be realized.
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 income tax returns of the Bank for 2014, 2015
and 2016 are subject to examination by income taxing authorities, generally for three years after they were filed.
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.
The results for the year ended December 31, 2017 include the effect of the Tax Cuts and Jobs Act (“the Act”), which was signed
into law on December 22, 2017. The Act becomes effective January 1, 2018 and among other things, permanently lowers the
federal corporate income tax rate to 21% from the maximum rate prior to the passage of the Act of 35%. When the federal
corporate income tax rate changes, U.S. GAAP requires companies to re-measure their deferred tax assets and deferred tax
liabilities, including those accounted for in accumulated other comprehensive income, as of the date of enactment, and record
the corresponding effects as income tax expense. As a result of the permanent reduction in the corporate income tax rate, the
Bank recognized in the fourth quarter of 2017 a provisional $603,331 reduction in the value of its net deferred tax asset and
recorded a corresponding incremental income tax expense of $603,331 in its consolidated results of operations. The Bank’s
evaluation of the effect of the Act is subject to refinement for up to one year after enactment.
EARNINGS PER SHARE (EPS)
Basic EPS 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. Potential common shares that may be issued by the Bank relate solely to stock options
outstanding during the period and are determined using the treasury stock method.
The following shows the weighted average number of shares used in computing earnings per common share and the effect
on the weighted average number of shares of potentially dilutive common stock. The number of common shares for all periods
have been retroactively restated to reflect the effects of the 5% stock dividend declared on May 29, 2017.
Average number of common shares outstanding
Effect of dilutive options
Average number of common shares outstanding used to
calculate diluted earnings per common share
2017
2016
6,518,614
6,351,547
315,125
129,398
6,833,739
6,480,944
Stock options for 1,500 and 5,250 shares of common stock were not considered in computing diluted earnings per common
share for 2017 and 2016, respectively, because they were antidilutive.
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.
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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
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 public
business entities for fiscal years beginning after December 15, 2017. The Bank is currently in the process of evaluating the impact
of adoption of this ASU on the financial statements.
ASU 2016-01
In January 2016, the FASB issued ASU 2016-01: Financial Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities. The amendments in ASU 2016-01, among other things: 1) Requires
equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation
of the investee) to be measured at fair value with changes in fair value recognized in net income. 2) Requires public business
entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes. 3) Requires
separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e.,
securities or loans and receivables). 4) Eliminates the requirement for public business entities to disclose the method(s) and
significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at
amortized cost. The amendments in this ASU are effective for fiscal years beginning after December 15, 2017, including interim
periods within those fiscal years. The Bank does not expect the adoption of ASU 2016-01 to have a material impact on its
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 public business entities for fiscal years beginning after December 15, 2018, 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 public business entities for fiscal years beginning after
December 15, 2019, 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.
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ASU 2018-02
During February 2018, the FASB issued ASU 2018-02: Income Statement – Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments provide financial
statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to
retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts
and Jobs Act (or portion thereof) is recorded. The amendments are effective for all organizations for fiscal years beginning
after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. Organizations should apply
the proposed amendments either in the period of adoption or retrospectively to each period (or periods) in which the effect
of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The Bank has elected
to reclassify the stranded income tax effects from the Tax Cuts and Jobs Act in the financial statements for the period ending
December 31, 2017. The amount of this reclassification in 2017 was $94,406.
RECLASSIFICATION
Certain items in the 2016 financial statements have been reclassified to conform to the 2017 financial statement presentation.
SUBSEQUENT EVENTS
The date to which events occurring after December 31, 2017, the date of the most recent balance sheet, have been evaluated
for possible adjustment to the financial statements or disclosure is May 4, 2018, 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, 2017 and 2016 was $2,740.000 and $1,269,000, respectively.
3. Investments
The amortized cost and fair values of securities as shown in the balance sheets of the Bank are as follows:
DEC. 31, 2017
Available-for-Sale
Corporate Notes
Mortgage Backed Securities
Municipal Securities
SBA Loan Pools
Total Available-for-Sale
Held-to-Maturity
Municipal Securities
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
FAIR
VALUE
$ 3,761,254
$ 15,238
$ (31,217)
$ 3,745,275
37,471,255
15,551,471
5,842,225
289
25,841
—
(585,034)
(26,610)
(35,043)
36,886,510
15,550,702
5,807,182
62,626,205
41,368
(677,904)
61,989,669
14,869,181
62,660
(79,897)
14,851,944
TOTAL INVESTMENT SECURITIES
$ 77,495,386
$ 104,028
$ (757,801)
$ 76,841,613
DEC. 31, 2016
Available-for-Sale
Corporate Notes
Mortgage Backed Securities
SBA Loan Pools
Total Available-for-Sale
Held-to-Maturity
Municipal Securities
AMORTIZED
COST
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
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The amortized cost and estimated fair value of debt securities at December 31, 2017, 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
$ —
$ —
$ —
$ —
1,004,102
1,019,338
301,207
301,026
3,519,346
3,481,334
1,511,309
1,476,984
20,631,502
20,602,487
13,056,665
13,073,934
25,154,950
25,103,159
14,869,181
14,851,944
Mortgage Backed Securities
37,471,255
36,886,510
—
—
$62,626,205
$ 61,989,669
$ 14,869,181
$ 14,851,944
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, 2017 and 2016, U.S. Government and agency securities and mortgage backed securities with carrying values
of $20,395,555 and $16,610,637, 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, 2017, 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 Notes
$ 4,848
$ 1,752,305
$ 26,370
$ 973,631
Mortgage Backed Securities
261,935
19,990,034
323,099
15,552,456
Municipal Securities
26,610
8,432,383
—
—
SBA Loan Pools
TOTALS
Held-to-Maturity
1,779
1,394,617
33,263
4,412,566
$ 295,172
$ 31,569,339
$ 382,732
$ 20,938,653
Municipal Securities
$ 9,209
$ 889,371
$ 70,688
$ 5,436,625
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, 2017, 29 debt securities with an unrealized loss for less than one year and 40 debt securities with an
unrealized loss for greater than one year depreciated less than 1 percent from the Bank’s amortized cost basis. 45 of the
securities are secured by Federal agency mortgage backed securities or U.S. Treasury obligations and direct obligations of U.S.
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Government agencies. 5 of the securities are corporate bonds and 20 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 consist of the following at December 31:
Federal Reserve Bank
Federal Home Loan Bank
Community Bankers Bank
TOTALS
4. LOANS RECEIVABLE (RESTATED)
Loans receivable include the following at December 31:
Commercial and Industrial
Consumer and Other
Real Estate
Subtotals
Deferred Loan Fees, net
TOTALS
2017
2016
$ 1,571,300
$ 1,434,100
896,200
66,000
2,218,300
66,000
$ 2,533,500
$ 3,718,400
2017
(Restated)
2016
$ 64,153,229
$ 60,278,401
20,754,304
16,517,598
322,873,452
331,289,560
407,780,985
408,085,559
(448,213)
(521,418)
$ 407,332,772
$ 407,564,141
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 – construction loans: This portfolio consists of commercial and residential construction loans secured by real
estate. The loans are secured by property and generally made with a loan-to-as built and loan-to-as-completed value not
exceeding 75 percent.
Real estate – residential and home equity loans: This portfolio consists of residential first and second mortgage 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.
Consumer loans: This portfolio consists of car loans, boat loans, loans secured by stock and unsecured loans. The consumer
loans are generally made to borrowers with a minimum credit score of 700 and a maximum debt to income ratio of 40%.
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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 2017
Allowance for Loan Losses
COMMERCIAL
& INDUSTRIAL
REAL ESTATE -
COMMERCIAL
REAL ESTATE -
CONSTRUCTION
REAL ESTATE -
RESIDENTIAL
CONSUMER
TOTAL
Beginning Balance
$ 542,229
$ 2,311,155
$ 838,328
$ 402,615
$ 55,754
$ 4,150,081
Charge-offs
Recoveries
Provision
—
96,189
—
—
(283,530)
569,630
—
—
—
—
128,599
153,553
(260,245)
(34,296)
42,389
(283,530)
665,819
30,000
Ending Balance
$ 767,017
$ 2,464,708
$ 864,183
$ 368,319
$ 98,143
$ 4,562,370
Individually Evaluated for Impairment
28,529
—
—
Collectively Evaluated for Impairment
738,487
2,464,708
864,184
115,000
253,318
—
143,529
98,144
4,418,841
Loans Receivable
Ending Balance
$64,153,229 $202,399,170
$38,721,639
$81,752,643
$20,754,304 $407,780,985
Individually Evaluated for Impairment
$ 125,625
$ 1,479,649
— $ 640,943
— $ 2,246,217
Collectively Evaluated for Impairment
64,027,604
200,919,521
38,721,639
81,111,700
20,754,304
405,534,768
YEAR 2016
Allowance for 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
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An analysis of non-accrual and past due loans is as follows at December 31:
YEAR 2017
Commercial - Non-Real Estate
30-59 DAYS
PAST DUE
60-89 DAYS
PAST DUE
90 DAYS OR
MORE
PAST DUE
TOTAL
PAST DUE
CURRENT
TOTAL LOANS
RECEIVABLES
NONACCRUAL
LOANS
Commercial and Industrial
$ — $ 125,625
$ — $ 125,625 $ 64,027,604
$64,153,229
$ 125,625
Commercial - Real Estate
Owner Occupied
Non-Owner Occupied
Construction
Residential
Commercial
Consumer - Non-Real Estate
Automobile
Other
Residential
First Trusts
Equity Lines
TOTALS
YEAR 2016
Commercial - Non-Real Estate
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
— 100,716,901
100,716,901
— 101,682,269
101,682,269
— 20,714,000
20,714,000
— 18,007,639
18,007,639
—
664,501
664,501
— 20,089,803
20,089,803
— 71,988,442
71,988,442
—
—
—
—
—
—
—
— 540,500
540,500
9,223,701
9,764,201
540,500
$ — $125,625 $540,500
$ 666,125 $407,114,860 $407,780,985
$ 666,125
30-59 DAYS
PAST DUE
60-89 DAYS
PAST DUE
90 DAYS OR
MORE
PAST DUE
TOTAL
PAST DUE
CURRENT
TOTAL LOANS
RECEIVABLES
NONACCRUAL
LOANS
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
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An analysis of impaired loans based on loan segment is as follows at December 31:
YEAR 2017
With No Related Allowance Recorded:
Real Estate
Construction
Commercial
Residential
Commercial and Industrial
With An Allowance Recorded:
Real Estate
Construction
Commercial
Residential
Commercial and Industrial
Consumer
TOTAL
Real Estate
YEAR 2016
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
$ —
$ —
$ —
$ —
$ —
1,489,050
116,779
71,712
6,961
1,479,649
1,479,649
104,443
104,443
—
—
—
—
—
—
—
—
—
—
—
—
—
—
536,500
125,625
—
536,500
125,625
—
115,000
28,529
—
657,084
134,028
—
2,120,592
2,120,592
115,000
2,262,913
—
—
—
—
5,635
—
78,673
5,635
—
$ 2,246,217
$ 2,246,217
$ 143,529
$ 2,396,941
$ 84,308
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
210,036
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
$ 2,312,045
$ 68,621
Commercial and Industrial
125,625
125,625
28,529
134,028
Consumer
—
—
—
—
Commercial and Industrial
210,136
210,036
$ 2,146,144
$ 2,146,044
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.
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An analysis of the credit quality indicators is as follows at December 31:
YEAR 2017
Commercial – Non-Real Estate
PASS
SPECIAL MENTION
SUBSTANDARD
DOUBTFUL
LOSS
Commercial and Industrial
$ 63,394,410
$ 633,194
$ — $ 125,625 $ —
Commercial – Real Estate
Owner Occupied
Non-Owner Occupied
Construction
Residential
Commercial
Consumer – Non-Real Estate
Automobile
Other
Residential
First Trusts
Equity Lines
TOTALS
YEAR 2016
Commercial – Non-Real Estate
97,493,592
101,682,269
20,714,000
18,007,639
664,501
20,060,528
71,966,269
9,145,430
1,743,660
1,479,649
—
—
—
—
29,275
—
82,272
—
—
—
—
—
22,172
536,500
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
$ 403,128,638
$ 2,488,401
$ 2,038,321
$ 125,625 $ —
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
$ —
$ —
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.
As of December 31, 2017 and December 31, 2016, the Bank had a recorded investment in troubled debt restructurings of
$230,068 and $245,352 respectively. The Bank allocated $28,529 and $0 of specific allowance for those loans at December 31,
2017 and December 31, 2016.
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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 $1,463,571 and $4,176,267 at December 31, 2017 and 2016,
respectively. New loans made to such related parties amounted to $0, and repayments amounted to $2,712,696 in 2017.
5. BANK PREMISES AND EQUIPMENT
Bank premises and equipment include the following:
Furniture and Equipment
Leasehold Improvements
Construction in Progress
Software
Total Cost
Less Accumulated Depreciation
2017
2016
$ 1,475,882
$ 1,419,660
1,181,317
1,111,336
240,760
118,560
13,198
58,345
3,016,519
2,602,539
(1,420,944)
(1,163,659)
NET BANK PREMISES AND EQUIPMENT
$ 1,595,575
$ 1,438,880
Depreciation and amortization of bank premises and equipment charged to expense amounted to $257,284 and $229,487 in
2017 and 2016, respectively.
6. DEPOSITS
The following are time deposits maturing in years ending December 31:
2018
2019
2020
2021
2022
TOTAL
$ 125,877,941
56,065,582
8,040,500
14,380,725
5,128,453
$ 209,493,201
Time deposits in denominations that meet or exceed the FDIC minimum limit of $250,000 or more totaled $66,371,688 and
$68,592,296 at December 31, 2017 and 2016, respectively.
The Bank held related party deposits of approximately $7,083,000 and $10,140,000 at December 31, 2017 and
2016, respectively.
7. BORROWINGS AND ADVANCES
At December 31, 2017 and 2016, 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, 2017 and 2016.
At December 31, 2017 and 2016, 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 line is 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, 2017 and 2016.
At December 31, 2017 and 2016, the Bank had $10,000,000 available under a line of credit Fed Funds facility to be used for
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overnight cash settlements. The line is 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, 2017 and 2016. There were no borrowings on this line at December
31, 2017 and 2016.
At December 31, 2017 and 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, 2017 and 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, 2017 and 2016 was
$1,428,571 and $1,714,286, respectively.
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, 2017 and 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.
On March 27, 2017, the Bank entered into an additional agreement with the FHLB for $3,000,000 advanced under the fixed rate
credit facility. The agreement calls for monthly interest payments at 1.81% percent and matures on March 27, 2020. The balance
at December 31,2017 and 2016 was $3,000,000 and $0.
On March 27, 2017, the Bank entered into an additional agreement with the FHLB for $3,000,000 advanced under the fixed
rate credit facility. The agreement calls for monthly interest payments at 2.18% and matures on March 27, 2022. The balance at
December 31, 2017 and 2016 was $3,000,000 and $0.
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, 2017 and 2016, interest expense on the borrowings was $172,206
and $119,910, respectively.
Principal maturities by year are as follows:
2018
2019
2020
2021
2022
Thereafter
TOTAL
$ 285,714
285,714
3,285,714
3,285,714
3,285,715
—
$ 10,428,571
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8. INCOME TAXES (RESTATED)
Year-end deferred tax assets and liabilities were due to the following:
Deferred Tax Assets
Allowance for loan losses
Unearned loan fees and costs, net
Accrued vacation
Non-accrual loan interest
Unrealized losses on securities
Stock options
Deferred Tax Liabilities
Depreciation
Interest rate lock
Net deferred tax assets
Income tax expense (benefit) was as follows:
Current Tax Expense
Deferred Tax (Benefit) Expense
Deferred Tax Asset Adjustment for Enacted Change in Tax Rate
2017
2016
$ 820,195
$ 1,904,505
94,125
52,500
11,690
152,502
52,734
177,283
68,000
192,546
269,631
77,381
1,183,746
2,689,346
200,868
8,264
209,132
365,721
35,354
401,075
$ 974,614
$ 2,288,271
2017
$ 1,098,859
2016
$ 1,705,143
687,602
603,331
(428,263)
—
$ 2,389,792
$ 1,276,880
Income tax expense for 2017 includes a provisional downward adjustment of net deferred tax assets in the amount of $603,331,
recorded as a result of the enactment of the Tax Cuts and Jobs Act on December 22, 2017. The Bank’s marginal tax rate prior to
the enactment of the Act is 34%. Effective January 1, 2018, the Company’s tax rate will be 21%.
Effective tax rates differ from the federal statutory rate of 34% applied to income before income taxes due to the following:
Federal statutory rate times financial statement income
Effect of:
Tax-exempt income
Earnings from bank-owned life insurance
Deferred tax asset adjustment for enacted change in tax rate
Stock compensation
Other
2017
$ 1,728,938
2016
$ 1,336,622
(138,966)
(19,183)
603,331
68,786
146,886
(121,185)
(20,411)
—
60,105
21,749
$ 2,389,792
$ 1,276,880
9. CAPITAL REQUIREMENTS
The Bank is subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that,
if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and
the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The
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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, 2017 and, 2016, that the Bank meets all the capital adequacy requirements to which
it is subject.
As of December 31, 2017, 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,
CET1 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, 2017 and 2016 are as follows:
ACTUAL
FOR CAPITAL
ADEQUACY PURPOSES
MINIMUM TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
AMOUNT
RATIO
AMOUNT
RATIO
AMOUNT
RATIO
DEC. 31, 2017
Total Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Risk Weighted Assets)
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Adjusted Average Assets)
DEC. 31, 2016 (RESTATED)
Total Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Risk Weighted Assets)
Common Equity Tier 1 Capital
(to Risk Weighted Assets)
Tier 1 Capital
(to Adjusted Average Assets)
$60,370,258
14.41%
$33,508,352
8.00%
$41,885,440
10.00%
$55,807,888
13.32%
$25,131,264
6.00%
$33,508,352
8.00%
$55,807,888
13.32%
$18,848,448
4.50%
$27,225,536
6.50%
$55,807,888
10.19%
$21,916,680
4.00%
$27,395,850
5.00%
$56,620,327
13.33%
$33,980,095
8.00%
$42,475,119
10.00%
$52,470,246
12.35%
$25,485,071
6.00%
$33,980,095
8.00%
$52,470,246
12.35%
$19,113,803
4.50%
$27,608,827
6.50%
$52,470,246
10.82%
$19,398,600
4.00%
$24,248,250
5.00%
10. STOCK OPTION PLAN (RESTATED)
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, 2017:
2007 Plan
AUTHORIZED
GRANTED
875,280
854,761
VESTED
559,568
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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, 2017, there was approximately $246,000 in unrecognized
compensation expense related to non-vested share-based compensation that is expected to be recognized over a weighted
average period of 1.62 years. At December 31, 2016, there was approximately $471,000 in unrecognized compensation expense
related to non-vested share-based compensation.
Amounts and the number of options have been retrospectively adjusted for the 5% stock dividend that was effective on, June
23, 2017. The Bank canceled and reissued stock options granted in 2007.
The following summarizes the option activity under the Plan:
OUTSTANDING, DECEMBER 31, 2015
Grants
Exercised
Canceled or Expired
OUTSTANDING, DECEMBER 31, 2016
Grants
Exercised
Canceled or Expired
OUTSTANDING, DECEMBER 31, 2016
NUMBER OF
SHARES
WEIGHTED
AVERAGE
EXERCISE PRICE
580,410
141,225
(4,990)
(18,253)
698,392
42,186
(8,749)
(35,050)
696,779
$ 6.70
7.89
5.97
8.04
6.92
10.16
7.53
8.81
$ 7.01
The weighted average fair value of options granted during the year ended December 31, 2017 was $10.16. The weighted
average remaining contractual life of options outstanding as of December 31, 2017 is 5.0 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 expected volatility is based on the average of the historical volatility of peer institutions and the Bank. 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 of zero.
The fair value of options granted was determined using the following weighted-average assumptions as of each grant date.
Risk-free interest rate
Expected term (years)
Expected stock price volatility
Dividend yield
2017
2.32%
5.61
32.09%
0.00%
2016
1.45%
6.50
33.55%
0.00%
For the years ended December 31, 2017 and 2016, the Bank recognized $225,837 and $371,971 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
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.
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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 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.
In February 2017, the Bank entered into a lease agreement for office space in Chantilly, Virginia. The agreement provides for
an initial lease term of three years commencing March 1, 2017 through February 28, 2020 with the option to extend the term
for an additional three years. Total base annual payments are $161,400 for the first year increasing 3% per annum thereafter.
The lease agreement is for 6,725 square feet. The agreement includes additional rent payments based on a pro rata portion of
annual taxes, common area maintenance charges, and utilities.
In June 2017, the Bank entered into a lease agreement for additional office space in Chantilly, Virginia. The agreement provides
for an initial lease term of five years commencing December 1, 2017 through November 30, 2022 with the option to extend
the term for an additional two terms of five years each. Total base annual payments are $33,360.00 for the first year increasing
2.5% per annum thereafter. The lease agreement is for 1,112 square feet. The agreement includes additional rent payments
based on a pro rata portion of annual taxes, common area maintenance charges, and utilities.
The following are the future minimum lease payments at December 31, 2017:
YEARS ENDING DECEMBER 31
2018
2019
2020
2021
2022
Thereafter
$ 877,039
889,986
912,570
863,428
701,143
1,196,419
$ 5,440,585
Rent expense amounted to $823,706 and $842,487 for the years ended December 31, 2017 and 2016, respectively.
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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 consider observable market data (Level 2).
Derivative asset – IRLCs: The Bank recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the
underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for
individual loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Bank’s IRLCs are
classified as 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
DECEMBER 31, 2017
Available-for-Sale Securities
$ 61,989,669
$ —
$ 61,989,669
$ —
Derivative asset - IRLCs
39,354
—
$ 39,354
—
$ 62,029,023
$ —
$ 62,029,023
$ —
DECEMBER 31, 2016
Available-for-Sale Securities
$ 29,074,040
$ —
$ 29,074,040
$ —
Derivative asset - IRLCs
103,983
—
$ 103,983
—
$ 29,178,023
$ —
$ 29,178,023
$ —
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Certain financial assets are measured at fair value on a nonrecurring basis in accordance with GAAP. Adjustments to the fair value
of these assets usually result from the application of lower-of-cost- or-market accounting or write-downs of individual assets.
The following describes the valuation techniques used by the Bank to measure certain financial assets recorded at fair value on a
nonrecurring basis in the financial statements:
IMPAIRED LOANS:
Loans are designated as impaired when, in the judgment of management based on current information and events, it is probable
that all amounts due according to the contractual terms of the loan agreement will not be collected. The measurement of loss
associated with impaired loans can be based on either the observable market price of the loan or the fair value of the collateral.
Fair value is measured based on the value of the collateral securing the loans. Collateral may be in the form of real estate or
business assets, including equipment, inventory and accounts receivable. The vast majority of the collateral is real estate. The
value of real estate collateral is determined utilizing an income or market valuation approach based on an appraisal conducted
by an independent, licensed appraiser outside of the Bank using observable market data (Level 2). However, if the collateral is
a house or building in the process of construction, or if an appraisal of the real estate property is over two years old, then the
fair value is considered Level 3. The value of business equipment is based upon an outside appraisal if deemed significant, or
the net book value on the applicable business’ financial statements if not considered significant using observable market data.
Likewise, values for inventory and accounts 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
DECEMBER 31, 2017
Impaired Loans
$ 518,596
$ —
$ —
$ 518,596
DECEMBER 31, 2016
Impaired Loans
$ 942,841
$ —
$ —
$ 942,841
The following table presents quantitative information about Level 3 fair value measurements for financial assets measured at fair
value on a non-recurring basis as of December 31, 2017:
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2017
FAIR VALUE
VALUATION
TECHNIQUE(S)
UNOBSERVABLE
INPUTS
RANGE OF INPUTS
Impaired Loans
$ 518,596
Appraisals
Discount to reflect current
market conditions and
estimated selling costs
10% - 15%
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
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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
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, 2017 and 2016, the fair values of loan commitments and
standby letters of credit are immaterial. Therefore, they have not been included in the following table.
The carrying amounts and estimated fair values of the Bank’s financial instruments are as follows at December 31:
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2017 USING
CARRYING
AMOUNT
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
Financial Assets
Cash and Due from Banks
$ 1,164,368
$ 1,164,368
$ — $ — $ 1,164,368
Interest Bearing Deposits with Banks
33,936,870
33,936,870
Federal Funds Sold
127,000
127,000
Securities Available-for-Sale
Securities Held-to-Maturity
Loans Held for Sale
Loans Receivable, net
Derivative asset - IRLCs
61,989,669
14,869,181
7,772,501
402,770,402
39,354
—
—
—
—
—
Accrued Interest Receivable
1,643,427
1,643,427
—
—
61,989,669
14,851,944
7,772,501
—
—
—
—
—
33,936,870
127,000
61,989,669
14,851,944
7,772,501
— 398,360,0000
398,360,0000
39,354
—
—
—
—
39,354
1,643,427
2,338,146
Bank-owned Life Insurance
2,338,146
—
2,338,146
TOTAL FINANCIAL ASSETS
$526,650,918
$ 36,871,665
$ 86,991,614
$398,360,000
$522,223,279
Financial Liabilities
Demand Deposits
Time Deposits
Federal Home Loan Bank Advances
10,428,571
—
10,428,571
Accrued Interest Payable
162,749
162,749
—
$256,487,419
$256,487,419
$ — $ — $256,487,419
209,493,201
— 209,039,000
—
—
—
209,039,000
10,428,571
162,749
TOTAL FINANCIAL LIABILITIES $476,571,941
$256,650,168
$219,467,571
$ — $476,117,740
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FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2016 USING
CARRYING
AMOUNT
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
Financial Assets
Cash and Due from Banks
$ 1,251,102
$ 1,251,102
$ — $ — $ 1,251,102
Interest Bearing Deposits with Banks
4,358,332
4,358,332
Federal Funds Sold
24,108,000
24,108,000
Securities Available-for-Sale
Securities Held-to-Maturity
Loans Held for Sale
Loans Receivable, net
Derivative asset - IRLCs
29,074,040
15,035,844
7,488,194
403,414,060
103,983
—
—
—
—
—
Accrued Interest Receivable
1,351,819
1,351,819
—
—
29,074,040
14,258,168
7,488,194
—
—
—
—
—
4,358,332
24,108,000
29,074,040
14,258,168
7,488,194
— 401,871,989
401,871,989
103,983
—
—
—
—
103,983
1,351,819
2,281,726
Bank-owned Life Insurance
2,281,726
—
2,281,726
TOTAL FINANCIAL ASSETS
$488,467,100
$ 31,069,253
$ 53,206,111
$401,871,989
$486,147,353
Financial Liabilities
Demand Deposits
Time Deposits
Federal Home Loan Bank Advances
43,714,286
—
43,714,286
Accrued Interest Payable
175,072
175,072
—
$180,411,982
$180,411,982
$ — $ — $180,411,982
218,980,247
— 219,914,252
—
—
—
219,914,252
43,714,286
175,072
TOTAL FINANCIAL LIABILITIES $443,281,587
$180,587,054
$263,628,538
$ — $444,215,592
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
2017
2016
$ 95,568,000
$ 99,651,000
$ 2,372,000
$ 1,596,000
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established
in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of
a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do
not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case
basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management’s
credit evaluation. Collateral held varies, but may include accounts receivable, inventory, property and equipment, and income-
producing commercial properties.
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.
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The Bank has not been required to perform on any financial guarantees during the past two years. The Bank has not incurred
any losses on its commitments in 2017 or 2016.
14. DEFERRED BENEFITS
The Bank has a contributory 401(k) savings plan covering substantially all employees, which allows eligible employees to contribute
up to 100 percent of their compensation, subject to the limits established by the IRS for 401(k) contributions. 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 $226,000 and $193,000 for each of the years ended December 31, 2017 and 2016, respectively.
The Bank has deferred compensation plans for its directors, and its executives. 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.
15. ACCUMULATED OTHER COMPREHENSIVE LOSS
The following table presents the changes in accumulated other comprehensive loss, by category, net of tax, for the periods
indicated:
Unrealized
Gains (Losses) on
Available-for-Sale
Securities
Unrealized Losses
on Securities
Transferred from
Available-for-Sale to
Held-to Maturity
Accumulated Other
Comprehensive Loss)
BALANCE AT DECEMBER 31, 2015
$ (377,412)
$ —
$ (377,412)
Transfer of from AFS to HTM, net of tax of $32,212
Amortization of transferred securities, net of tax of $248
Reclassification for losses on sales net of tax of $10,657
Unrealized losses net of tax of $64,799
BALANCE AT DECEMBER 31, 2016
62,529
—
(20,686)
(125,786)
(62,529)
482
—
—
—
482
(20,686)
(125,786)
$ (461,355)
$ (62,047)
$ (523,402)
Amortization of transferred securities, net of tax of $1,477
Reclassification for losses on sales net of tax of $6,101
Unrealized gains net of tax of $27,347
Reclassification of stranded tax effects from change in tax rate
—
(11,842)
53,084
(82,749)
2,868
—
—
(11,657)
2,868
(11,842)
53,084
(94,406)
BALANCE AT DECEMBER 31, 2017
$ (502,862)
$ (70,836)
$ (573,698)
16. LEGAL CONTINGENCIES
Various legal claims can arise from time to time in the normal course of business which, in the opinion of management, will
have no material effect on the Bank’s financial statements.
17. RELATED PARTY TRANSACTIONS
In 2017, the Bank began using a brokerage firm, at which one of the Bank’s directors is a principal, through which it offers
benefits such as payroll services and health and dental insurance for employees of the Bank. The brokerage firm receives
commission payments directly from the benefit providers and the Bank pays no fees to the brokerage firm. Also, in 2017 and
2016, the Bank obtained legal services from a law firm, at which one of its directors was a partner.
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SHAREHOLDER
& COMPANY INFORMATION
BOARD OF DIRECTORS
ALVIN E. NASHMAN, PH.D
RICHARD C. LITMAN
FRONT ROW (L TO R)
CRAIG S. UNDERHILL
PRESIDENT &
CHIEF EXECUTIVE OFFICER
JOHN T. ROHRBACK
VICE CHAIRMAN
BACK ROW (L TO R)
ROBERT FALESE, JR.
G. THOMAS COLLINS, JR.
CYNTHIA CARTER ATWATER
CORPORATE SECRETARY
TERRY L. COLLINS, PH.D
H. JASON GOLD
CHAIRMAN
BRANDON C. PARK
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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
JAMES N. NEWSOME
Founding Chairman & CEO
2000-2003
Director Emeritus
JOHN F. CARMAN
Founding Director & Vice Chairman
2000-2006
In Memoriam
GEORGE C. DUKAS
Director
2002-2005
Director Emeritus
WILLIAM G. DUKAS
Founding Director
2000-2011
In Memoriam
MICHAEL A. FALKE
Founding Director
2000-2002
NORMAN P. HORN
Director Emeritus
TIMOTHY P. HECHT
Director
2005-2007
Director Emeritus
DAVID C. KARLGAARD, Ph.D
Director Emeritus
GEORGE Z. KONTZIAS
Director
2002-2006
Director Emeritus
MICHAEL A. MIRANDA
Co-Founder & Organizing Director
2000-2013
In Memoriam
RUSSELL E. SHERMAN
Founding Director
2000-2007
In Memoriam
HARRY N. SNYDER, O.D.
Founding Director
2000-2007
JAMES F. STEFFEY
Founding Director
2000-2007
In Memoriam
C. STEPHEN TEMPLETON
Founding Director
2000-2002
CHARLES M. WRIGHT
Founding Director
2000-2002
Director Emeritus
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MANAGEMENT TEAM
EXECUTIVE OFFICERS & SENIOR LEADERSHIP TEAM
FRONT ROW (L TO R)
CATHERINE O. BRAGAN
Senior Vice President
Client Services
RAJ MEHRA
Executive Vice President
Chief Financial Officer
KENDRA MCKEE
Vice President
Human Resources
JENNY JOUDEH
Senior Vice President
Banking Administration
& Operations
CRAIG S. UNDERHILL
President &
Chief Executive Officer
DONNA P. RAKES
Senior Vice President
Chief Risk Officer
BACK ROW (L TO R)
JAMES C. WHIRLEY
Senior Vice President
Accounting
THOMAS E. BROWN
Senior Vice President
Information Technology
RICHARD A. HUTCHISON
Executive Vice President
Chief Mortgage Officer
NMLS# 179316
KIMBERLY J. RYMAN
Senior Vice President
Compliance
KATHLEEN S. CROSON
Executive Vice President
Chief Banking Officer
C. KEVIN CURTIS
Executive Vice President
Chief Lending Officer
NMLS# 1040247
SALLY T. SIVERONI
Executive Vice President
Chief Credit Officer
NOT PICTURED
KARIN M. JOHNS
Executive Vice President
Chief Accounting Officer
ROBERT D. WILLEY, JR.
Executive Vice President
Commercial Banking
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MORTGAGE LOAN OFFICERS
ANDREW CHEVALIER
Mortgage Loan Officer
NMLS# 1696419
SCOTT HILL
Senior Mortgage Loan Officer
NMLS# 187713
STEVEN L. MITCHELL
Senior Mortgage Loan Officer
NMLS# 888275
KIM-ANN H. CYBULSKI
Senior Mortgage Loan Officer
NMLS# 188605
CHARLES G. HUTCHISON
Mortgage Loan Officer
NMLS# 1019699
BRENDON MURPHY
Mortgage Loan Officer
NMLS# 1669843
GEORGE J. DECKER
Senior Mortgage Loan Officer
NMLS# 525099
EVAN KAY
Mortgage Loan Officer
NMLS# 1459364
CHRISTOPHER PERSIL
Senior Mortgage Loan Officer
NMLS# 188099
KEVIN P. DENNIS
Senior Mortgage Loan Officer
NMLS# 185900
CHRISTINE S. KERN
Senior Mortgage Loan Officer
NMLS# 970512
BONNIE L. ZAPF
Senior Mortgage Loan Officer
NMLS# 188572
ANGELA GANSOR
Mortgage Loan Officer
NMLS# 431133
PAIGE LUTZ
Senior Mortgage Loan Officer
NMLS# 1052568
STEFAN GOLDFADEN
Senior Mortgage Loan Officer
NMLS# 886220
ALBERT MAGHAMEZ
Senior Mortgage Loan Officer
NMLS# 188407
COMMERCIAL BANKING
VISHAL M. GANDHI
Senior Vice President
and Team Leader
CHRISTINA R. HJELMQUIST
Vice President
Treasury Management
EDWARD W. LULL, JR.
Senior Vice President
DANIEL E. MARKS
Vice President
NMLS# 618696
MARTIN MCCLARNON
Vice President
NMLS# 1060021
JAMES T. NELSON, III
Senior Vice President
BRANCH LOCATIONS
DARREN T. TULLY
Vice President
NMLS# 1066465
MICHAEL J. UNDERWOOD
Senior Vice President
and Team Leader
CHANTILLY
FAIRFAX
RESTON
DEREGE W. DENU
Vice President/Branch Manager
NMLS# 150524
SALMA SUFI
Vice President/Branch Manager
NMLS# 1504176
ALFREDO G. MOLINA
Assistant Vice President/
Branch Manager
NMLS# 1306195
VIENNA
PAULA A. NEWSOME
Vice President/Branch Manager
NMLS# 993276
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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 5 Team
6201 Fifteenth Avenue
Brooklyn, NY 11219
718-921-8300
www.astfinancial.com
INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM
Dixon Hughes Goodman LLP
Gaithersburg, Maryland
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
Wednesday, August 29, 2018 – 10:00 a.m.
at the Westwood Country Club
800 Maple Avenue East
Vienna, VA 22180
CHANTILLY
FAIRFAX
RESTON
VIENNA
4500 Daly Drive, Suite 240
Chantilly, VA 20151
10555 Main Street
Fairfax, VA 22030
11700 Plaza America Drive
Reston, VA 22190
502 Maple Avenue W.
Vienna, VA 22180
571-395-4000
703-242-5300
703-663-2300
703-667-4170
MORTGAGE DIVISION
4211 Pleasant Valley Road
Chantilly, VA 20151
703-766-6400
OTCQX : FDVA