Experience Innovation • Bank With Freedom
2018
ANNUAL
REPORT
Experience Innovation • Bank With Freedom
Experience Innovation • Bank With Freedom
Business Banking
Personal Banking Mortgage Banking
ABOUT THE BANK
OUR VISION
• Provide compelling ideas, relevant financial products, and exceptional service to our clients in the way they
wish to be served
• Focus on building lead relationships with businesses, real estate owners, and professionals with sales offices
across Northern Virginia and the DC Metropolitan Service Area
• Concentrate on industry verticals to deliver unique, sector-specific solutions and have market executives to
engage local businesses and communities
• Use innovative technology, a network of sales offices, and a team of experienced bankers to make banking
functional and convenient for businesses and consumers
OUR CORE VALUES
• Freedom Bank’s innovative approach to banking starts with IDEAS based upon a keen understanding of
client needs and market opportunities.
> INNOVATION - Exhaust all options and take smart risks
> DISCIPLINE - Act with unwavering integrity
> EXPERIENCE - Deliver exceptional outcomes
> ATTITUDE - Build relationships through teamwork and respect
> SERVICE - Participate in our communities and industries
• Our IDEAS help define the value we bring to lead client relationships and in the capabilities that we develop
on our team or through partnering with best-in-class product providers.
FINANCIAL HIGHLIGHTS
SHAREHOLDERS EQUITY
TIER 1 CAPITAL RATIO
%
60
58
56
54
52
50
0
$59.1
$55.3
$52.0
2016
2017
2018
Rounded $MM as of December 31
%
15
10
5
0
12.35%
13.32%
14.73%
2016
2017
2018
As of December 31
Experience Innovation • Bank With Freedom
00DFDDF A LETTER TO OUR SHAREHOLDERS
April 15, 2019
Dear Shareholders:
On behalf of our directors and officers, we are pleased to present our 2018 Annual Report and to share the highlights
of our financial performance and the development of a new strategic plan over the past year. We are both in new
roles at the Bank this year which reflects the period of significant and exciting change across our board, management
team and operating platform that has occurred. In 2018, we made huge strides to improve our operations and to
invest in our people and technology in order to position our company for improved financial results going forward.
The excitement about our future and the talent in place to capitalize on our opportunity are captured in the faces of
our talented and diverse colleagues portrayed on the cover of this report.
We would be remiss if we did not take a moment to recognize the efforts of several dedicated and talented Directors
who have retired since the beginning of 2018 through the writing of this letter. Richard C. Litman, Craig S. Underhill,
Alvin E. Nashman, Terry L. Collins, Robert Falese, Jr., and G. Thomas Collins Jr. have served admirably and we are
grateful for their efforts on behalf of our shareholders. We are also excited to welcome a new class of energetic
and diverse Directors during 2018 through the writing of this letter, including Brandon C. Park, Joseph J. Thomas,
Lauren Friend McKelvey, Joseph M. English III, Kevin J. Kooman, and Maury Peiperl. Our proxy provides background
information on these current and nominated Directors for election.
Over our 17-year history, the Bank has returned 31.42% to its shareholders, as compared to 12.7% over the same time
period for the KBW NASDAQ Bank Index as provided by S&P Global. However, recent results have been disappointing
and the board recognized that there were important areas where the Bank could improve its performance after a
period of rapid growth. The board, therefore, embarked on a corporate-wide restructuring in the second half of
2018 to create the new Freedom Bank. The balance sheet restructuring and efforts to reduce overhead expenses
have positioned us to be much stronger financially at a time in our economy of great uncertainty. The new strategic
plan adopted by the board this year has set up the company for the Bank’s next chapter of improving financial
performance and returns to shareholders.
The Bank undertook a conscious effort over the past twelve months to de-risk its balance sheet by growing total
shareholder equity and increasing tier 1 capital ratios as graphically displayed on the charts contained on the adjacent
page. Total shareholder equity at the end of 2018 reached $59.1 million up 6.9% over 2018, and, as a result, the
Bank’s Tier 1 Capital Ratio increased to 14.7% at year-end 2018, a 10.9% increase over 2017 and well ahead of the
10% “well capitalized” regulatory requirement. We also bolstered the Bank’s allowance for loan losses to 1.15% of
total loans, a 4.4% increase over the prior year and well ahead of peer.
It is important to note that part of this improvement was the sale of 128,791 shares of common stock to our new CEO
and certain existing investors via a contractual pre-emptive rights offering which raised $1.4 million of new capital for
the Bank. This represents a strong show of support by current management and investors; and ensures that there is a
strong alignment by management and the board with all shareholders. With this capital and the strong economic and
demographic factors in the Northern Virginia banking market, the Bank has exceptional credit quality metrics, as well
as excess capital by regulatory standards, which together provide abundant capacity for stable and steady growth.
We have also begun to improve key fundamental elements of our franchise value by increasing “core deposits.” The
level of core deposits is widely recognized as one of the most important financial metrics of community banks given
A LETTER TO OUR SHAREHOLDERS
01
A LETTER TO OUR SHAREHOLDERS (CONT.)
the greater stability and lower cost of funding. Non-interest bearing and interest checking deposits as a percent of
total deposits increased to 19% as compared to 16% in 2017 and we now have 75.7% of our deposits deemed as
core deposits (e.g. excluding brokered deposits and CDs over $250 thousand). Furthermore, in anticipation of the
inevitable slowing of the investor real estate market, we have made a deliberate shift in emphasis in our loan portfolio
to Commercial and Industrial loans and Owner Occupied Real Estate loans. These types of loans now comprise 46%
of our total loans as compared to 39% last year. This has enabled us to reduce the concentration of Commercial Real
Estate loans as a percentage of Tier 1 Capital to 182%, well below the regulatory threshold of 300%.
As detailed on the inside front cover, the board has adopted a new strategic plan with the vision to provide
compelling ideas, relevant financial products, and exceptional service to our clients in the way they wish to be served.
There are many elements to this new compelling vision that are expressed in our new brand promise: Experience
Innovation, Bank with Freedom. We have also revised our core values for all of our colleagues with the value
statement Freedom Bank’s innovative approach to banking starts with IDEAS based upon a keen understanding of
client needs and market opportunities.
These values will enable us to drive a new model of the community bank of the future with seven key strategic
initiatives focused on industry verticals, regional markets, lending products, treasury service products, capital market
products, digital capabilities and M&A. We aspire to have these initiatives come together and build a banking
franchise with great potential. Freedom Bank now possesses a strong team of banking professionals, enjoys a
dynamic group of clients, and serves a robust set of communities, which together will enable us to deliver attractive
shareholder returns over time.
Sincerely,
H. JASON GOLD
Chairman of the Board
JOSEPH J. THOMAS, CFA
President & CEO
02 A LETTER TO OUR SHAREHOLDERS
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 sheets of The Freedom Bank of Virginia (the “Company”)
as of December 31, 2018 and 2017, and the related consolidated statements of operations, comprehensive income,
stockholders’ equity and cash flows for the years ended December 31, 2018 and 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, 2018 and 2017, and
the results of their operations and their cash flows for the years 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 audits. 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 audits 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 audits 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 audits
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 audits provide a reasonable basis for our opinion.
We have served as the Company’s auditor since 2017.
Gaithersburg, Maryland
March 19, 2019
INDEPENDENT AUDITOR’S REPORT
03
FINANCIAL STATEMENTS
BALANCE SHEETS
December 31
2018 and 2017
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
2018
$ 1,270,559
2017
$ 1,164,368
14,376,684
33,936,870
-
127,000
48,204,339
61,989,669
-
14,869,181
3,076,000
4,415,520
2,533,500
7,772,501
394,080,457
407,332,772
(4,572,393)
(4,562,370)
389,508,064
402,770,402
1,748,935
1,229,534
1,247,513
12,401,317
1,336,522
1,595,575
1,643,427
974,614
2,338,146
1,407,079
$478,814,987
$533,122,332
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
04
FINANCIAL 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, 2018 and 2017
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:
6,423,602 and 5,866,765 shares issued and outstanding
at December 31, 2018 and 2017, respectively (includes 115,000
and 0 unvested shares, respectively)
Non-Voting Common Stock:
673,000 and 660,143 shares issued and outstanding
at December 31, 2018 and 2017, respectively
Additional Paid-in Capital
Accumulated Other Comprehensive Loss, net
Retained Earnings
Total Stockholders’ Equity
2018
2017
$ 67,012,857
$ 69,942,247
128,403,358
184,271,412
3,023,239
2,273,760
202,292,311
209,493,201
400,731,765
465,980,620
17,142,857
10,428,571
1,607,491
218,537
1,256,202
162,749
$ 419,700,650
$ 477,828,142
-
-
63,086
58,668
6,730
6,601
57,416,068
53,241,342
(1,124,101)
(573,698)
2,752,554
2,561,277
59,114,337
55,294,190
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$478,814,987
$533,122,332
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
FINANCIAL STATEMENTS 05
STATEMENTS OF OPERATIONS
Years Ended December 31
2018 and 2017
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
2018
$ 21,016,737
2017
$ 21,117,267
2,224,165
1,993,655
466
19,922
23,241,368
23,130,844
5,352,235
322,373
5,674,608
4,831,359
172,206
5,003,565
Net Interest Income
17,566,760
18,127,279
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
Gain (Loss) on Sales of Investment Securities
Increase in Cash Surrender Value of
Bank-Owned Life Insurance
Total Non-Interest Income
NON-INTEREST EXPENSES
Officers and Employee Compensation and Benefits
Occupancy Expense
Equipment and Depreciation Expense
Insurance Expense
Professional Fees
Data and Item Processing
Business Development
Franchise Taxes
Mortgage Fees and Settlements
Other Operating Expense
Total Non-Interest Expenses
Income Before Income Taxes
406,000
30,000
17,160,760
18,097,279
3,168,195
279,132
(1,181,108)
4,314,314
251,128
17,943
63,171
56,420
2,329,390
4,639,805
11,654,250
10,916,694
1,098,985
1,002,240
664,284
438,813
2,108,033
1,249,830
245,294
553,238
498,411
830,158
556,024
363,673
1,682,060
930,667
225,535
492,508
711,797
770,775
19,341,296
17,651,973
148,854
5,085,111
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
06 FINANCIAL STATEMENTS
INCOME TAX EXPENSE (BENEFIT)
NET INCOME
2018
2017
(42,423)
2,389,792
$ 191,277
$ 2,695,319
EARNINGS PER COMMON SHARE – BASIC
$ 0.03
$ 0.41
EARNINGS PER COMMON SHARE – DILUTED
$ 0.03
$ 0.39
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING – BASIC
WEIGHTED-AVERAGE COMMON SHARES
OUTSTANDING – DILUTED
6,751,251
6,518,614
6,948,844
6,833,739
STATEMENTS OF COMPREHENSIVE INCOME
Years Ended December 31
2018 and 2017
Net Income
Other Comprehensive Income (Loss):
Unrealized holding gains (losses) on securities available-for-sale
arising during the year, net of taxes of $413,173 and ($27,347)
in 2018 and 2017, respectively
Losses (gains) on sales of securities available-for-sale, net of
taxes of ($248,033) and $6,101 in 2018 and 2017, respectively
Amortization of unrealized losses on securities transferred from
available-for-sale to held-to-maturity net of taxes of $18,830
and $1,477 in 2018 and 2017, respectively
2018
2017
$ 191,277
$ 2,695,319
(1,554,314)
53,084
933,075
(11,842)
70,836
2,868
Total Other Comprehensive Income (Loss):
(550,403)
44,110
COMPREHENSIVE INCOME (LOSS)
$ (359,126)
$ 2,739,429
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
FINANCIAL STATEMENTS 07
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31
2018 and 2017
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, 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
-
-
-
-
-
-
-
-
-
5% stock dividend
310,424
3,104
3,985,366
Stock warrants exercised
Stock options exercised
Stock-based compensation
28,463
8,749
-
285
255,882
87
-
65,826
225,837
-
2,695,319
2,695,319
44,110
-
44,110
(94,406)
94,406
-
-
-
-
(3,988,470)
-
-
-
-
-
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
Net income
Other comprehensive loss
-
-
-
-
-
-
Stock options exercised
315,903
3,159
2,241,842
Issuance of common stock
128,791
1,288
1,428,292
Restricted stock - vested
10,000
100
(100)
Stock-based compensation
- stock options
Stock-based compensation
- restricted stock
-
-
-
-
130,672
374,020
-
191,277
191,277
(550,403)
-
-
-
-
-
-
-
-
-
-
-
(550,403)
2,245,001
1,429,580
-
130,672
374,020
BALANCE, DEC. 31, 2018
6,981,602
$ 69,816 $57,416,068
$ (1,124,101) $2,752,554
$59,114,337
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
08 FINANCIAL STATEMENTS
STATEMENTS OF CASH FLOWS
Years Ended December 31
2018 and 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Provision for loan losses
Net amortization of available-for-sale securities
Net amortization of held-to-maturity securities
(Gains) losses on sales of investment 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
Gain on sale of other real estate owned
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
2018
2017
$ 191,277
$ 2,695,319
289,809
406,000
720,630
122,324
257,284
30,000
538,559
171,008
1,181,108
(17,943)
(3,168,195)
(4,314,314)
(120,543,245)
(161,044,213)
127,068,421
165,074,220
504,692
(4,097)
225,837
-
(126,589)
1,290,933
(63,171)
(56,420)
413,893
70,557
351,289
55,788
(291,608)
(328,372)
(342,741)
(12,323)
Net cash provided by Operating Activities
7,470,491
3,875,226
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in federal funds sold
Purchase of bank-owned life insurance
Net change in interest bearing deposits with banks
Loan (originations) 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
Proceeds from sale of other real estate owned
Purchase (sale) of restricted stock investments, net
Acquisition of bank premises and equipment
127,000
23,981,000
(10,000,000)
-
19,433,143
11,688,552
(7,015,763)
7,907,679
25,041,821
1,171,882
(542,500)
(443,169)
(29,578,538)
613,658
(48,817,670)
6,411,284
9,032,629
-
1,184,900
(413,979)
Net cash provided (used) in Investing Activities
47,368,645
(37,586,716)
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
FINANCIAL STATEMENTS
09
STATEMENTS OF CASH FLOWS
Years Ended December 31
2018 and 2017
CASH FLOWS FROM FINANCING ACTIVITIES
(Decrease) increase in deposits, net
Advances from the Federal Home Loan Bank
2018
2017
$ (65,248,855)
$ 66,588,391
39,000,000
6,000,000
Repayment of advances from the Federal Home Loan Bank
(32,285,714)
(39,285,715)
Proceeds from stock options
Proceeds from stock warrants
Proceeds from sale of stock, net
2,245,001
-
1,429,580
65,913
256,167
-
Net cash provided (used) in Financing Activities
(54,859,988)
33,624,756
Net increase (decrease) in cash and due from banks
106,191
(86,734)
Cash and due from banks, beginning of year
1,164,368
1,251,102
CASH AND DUE FROM BANKS, END OF YEAR
$ 1,270,559
$ 1,164,368
NONCASH INVESTING ACTIVITY
Unrealized gain (loss) on securities available-for-sale, net
$ (786,379)
$ 66,833
Transfer of securities from held-to-maturity to available-for-sale
$ 5,072,984
$ -
Unrealized, unamortized loss on securities remaining prior to
transfer to available-for-sale, net
$ 89,666
$ -
Loans transferred to other real estate owned
$ 1,167,785
$ -
SUPPLEMENTAL INFORMATION
Cash paid during the year for interest
Cash paid during the year for income taxes
$ 5,618,820
$ 5,015,888
$ -
$ 1,346,000
NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements.
10 FINANCIAL STATEMENTS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2018 AND 2017
1. Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of The Freedom Bank of Virginia (the Bank) conform to generally accepted
accounting principles in the United States of America (GAAP) and reflect practices of the banking industry. The policies are
summarized below.
NATURE OF OPERATIONS AND PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Freedom Bank of Virginia and its formerly wholly-owned
subsidiary, FBV Capital Advisors Inc. (FBVCA), a broker-dealer in securities, together referred to as “the Bank”. 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, Chantilly and Reston, Virginia, and serves customers primarily
in the Northern Virginia area. The Bank was in organization during the period January 27, 2000 through July 22, 2001, and
opened for business on July 23, 2001.
In September 2018, FBVCA was sold through a stock purchase agreement. The Bank recorded $22,900 and $24,723 in legal
fees related to the transaction for the year ended December 31, 2018 and 2017, respectively. Additionally, the Bank recorded
a gain on sale of approximately $38,000 for the year ended December 31, 2018. All intercompany balances and transactions
in 2017 have been eliminated in consolidation.
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 interest bearing deposits with other institutions. Interest bearing deposits are valued at cost. Interest
income is recorded as interest income on investment securities.
INVESTMENT SECURITIES
Investment securities are classified as either held-to-maturity, available-for-sale or trading securities. In determining such
classification, securities that the Bank has the positive intent and ability to hold to maturity are classified as held-to-maturity
and are carried at amortized cost. Securities classified as available-for-sale are carried at estimated fair value with unrealized
gains and losses included in stockholders’ equity on an after tax basis. Trading securities are carried at estimated fair value
with unrealized gains and losses included in non-interest income.
The amortization of premiums and accretion of discounts are recognized in interest income using methods approximating
the interest method over the period to maturity. Declines in the fair value of individual held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary result in write-downs of the individual securities to
their fair value. The related write-downs are included in earnings as realized losses. Gains and losses on sales of securities are
recorded on the trade date and are determined using the specific-identification method.
Federal Reserve Bank stock, Federal Home Loan Bank (FHLB) stock, and Community Bankers Bank stock are considered
restricted investment securities, are carried at cost and are evaluated annually for impairment. The stock is required in order to
be a member or for borrowings.
LOANS AND LOAN FEES
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are
stated at the principal amount outstanding, less the allowance for loan losses and net deferred loan fees. Interest on loans is
generally computed using the simple interest method.
FINANCIAL STATEMENTS
11
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 status 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 status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought
current and future payments are reasonably assured.
LOANS HELD-FOR-SALE
Loans held for sale consist primarily of residential mortgage loans, which are secured by one-to-four family residential real estate.
Loans held for sale are carried at the lower of aggregate cost, net of purchase discounts or premiums, deferred fees, and deferred
origination costs, or fair value. The Bank sells its mortgage loans forward to investors and the estimated fair value is largely
dependent upon the terms of these outstanding loan purchase commitments, as well as movement in market interest rates.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is maintained at a level that, in management’s judgment, is adequate to absorb 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
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.
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, 2018 and 2017.
12
FINANCIAL STATEMENTS
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.
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 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 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 to cause
the preferred stock to be issued in one or more series and, to the fullest extent permitted by law, to fix and determine the
preferences, limitations and relative rights of the shares of any series of preferred stock so established and provide for the
issuance of shares thereof.
Comprehensive income represents all changes in equity that result from recognized transactions and other economic events
of the period. Other comprehensive income (loss) refers to revenues, expenses, gains and losses that under accounting
principles generally accepted in the United States of America are included in comprehensive income but excluded from net
income, such as unrealized gains and losses on certain investments in debt and equity securities.
INCOME TAXES
Income taxes are provided for the tax effects of the transactions reported in the financial statements and consist of taxes
currently due plus deferred taxes related primarily to the difference between the basis of the allowance for loan losses. The
deferred tax assets and liabilities represent the future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or settled. Deferred tax assets and liabilities are reflected at
income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. As
changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes.
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 2015, 2016
and 2017 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 became effective January 1, 2018 and among other things, permanently
lowered 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.
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.
FINANCIAL STATEMENTS
13
Average number of common shares outstanding
Effect of dilutive options
Average number of common shares outstanding used to
calculate diluted earnings per common share
2018
2017
6,751,251
6,518,614
197,593
315,125
6,948,844
6,833,739
Stock options for 19,873 and 1,500 shares of common stock were not considered in computing diluted earnings per common
share for 2018 and 2017, respectively, because they were antidilutive. Non-vested restricted common shares, which carry all
rights and privileges of a common share with respect to the stock, including the right to vote, were included in the basic and
diluted per common share calculations.
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.
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 evaluated the overall impact on
affected revenue streams and any related contracts, including asset management fees, gains and losses on the sale of real
estate, deposit related fees and interchange fees. Based on this evaluation, the Bank determined that ASU 2014-09 did
not materially change the method in which revenue from impacted revenue streams was previously recognized. The Bank
applied the guidance using a modified retrospective approach. This approach requires the application of the new guidance to
uncompleted contracts at the date of adoption. Periods prior to the date of adoption were not retrospectively revised as the
impact on uncompleted contracts at the date of adoption was not material.
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 amendments related to equity securities without readily determinable fair values
were applied prospectively to equity investments that exist as of the date of the adoption of the amendments. ASU 2016-01
requires the use of exit price rather than entrance price in determining the fair value of loans not measured at fair value on a
non-recurring basis in the consolidated balance sheets. See Note 12 – Fair Value Measurements for information regarding the
change in the valuation of these loans. The adoption of ASU 2016-01 did not have a material impact on the Bank’s financial
statements.
14
FINANCIAL STATEMENTS
ASU 2016-02
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Among other things, in the amendments in ASU 2016-02,
lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement
date: (1) A lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis;
and (2) A right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the
lease term. Under the new guidance lessor accounting is largely unchanged. Certain targeted improvements were made to align,
where necessary, lessor accounting with the lessee accounting model and Topic 606, Revenue from Contracts with Customers.
The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within
those fiscal years. Early application is permitted upon issuance. Lessees (for capital and operating leases) and lessors (for sales-type,
direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into
after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach
would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees
and lessors may not apply a full retrospective transition approach. The FASB made subsequent amendments to Topic 842 in July
2018 through ASU 2018-10 (“Codification Improvements to Topic 842, Leases”) and ASU 2018-11 (“Leases (Topic 842): Targeted
Improvements”). Among these amendments is the provision in ASU 2018-11 that provides entities with an additional (and optional)
transition method to adopt the new lease standard. Under this transition method, an entity initially applies the new leases standard
at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts
the new leases standard will continue to be in accordance with current GAAP (Topic 840, Leases). The effect of adopting this
standard on January 1, 2019 was an approximately $3.75 million increase in assets and liabilities on our balance sheet.
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 began
archiving core loan data beginning in January 2018 in anticipation of the implementation of the new standard. Additionally, a
third-party vendor was engaged to begin running parallel models starting in the first quarter of 2019. The Bank is currently in
the process of evaluating the impact of adoption of this ASU on the financial statements.
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 2017 financial statements have been reclassified to conform to the 2018 financial statement presentation.
SUBSEQUENT EVENTS
The date to which events occurring after December 31, 2018, the date of the most recent balance sheet, have been evaluated
for possible adjustment to the financial statements or disclosure is March 19, 2019, 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, 2018 and 2017 was $1,737,000 and $2,740,000, respectively.
FINANCIAL STATEMENTS
15
3. Investments
The amortized cost and fair values of securities as shown in the balance sheets of the Bank are as follows:
DEC. 31, 2018
Available-for-sale
Corporate notes
AMORTIZED
COST
GROSS
UNREALIZED
GAINS
GROSS
UNREALIZED
LOSSES
FAIR
VALUE
$ 3,758,201
$ 22,592
$ (84,964)
$ 3,695,829
Mortgage backed securities
35,789,803
15,956
(895,425)
34,910,334
Municipal securities
SBA loan pools
Total Available-for-sale
Held-to-maturity
Municipal securities
5,070,380
5,008,870
49,627,254
-
2,828
41,376
(354,836)
(129,066)
4,715,544
4,882,632
(1,464,291)
48,204,339
-
-
-
-
TOTAL INVESTMENT SECURITIES
$ 49,627,254
$ 41,376
$ (1,464,291)
$ 48,204,339
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)
36,886,510
(26,610)
(35,043)
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
The amortized cost and estimated fair value of debt securities at December 31, 2018, 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
AMORTIZED COST
FAIR VALUE
$ -
$ -
1,505,797
1,462,222
4,381,522
4,335,916
7,950,132
7,495,867
13,837,451
13,294,005
Mortgage backed securities
35,789,803
34,910,334
$49,627,254
$48,204,339
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, 2018 and 2017, U.S. Government and agency securities and mortgage backed securities with carrying values of
$0 and $20,395,555, respectively, were pledged to secure public deposits and for other purposes required or permitted by law.
16
FINANCIAL STATEMENTS
Information pertaining to securities with gross unrealized losses at December 31, 2018, aggregated by investment category
and length of time that individual securities have been in a continuous loss position, is as follows:
Available-for-sale
Corporate notes
LESS THAN 12 MONTHS
OVER 12 MONTHS
GROSS
UNREALIZED
LOSSES
FAIR VALUE
GROSS
UNREALIZED
LOSSES
FAIR VALUE
$ 51,190
$ 451,981
$ 33,774
$ 966,226
Mortgage backed securities
19,300
3,433,339
876,125
29,833,703
Municipal securities
-
-
354,836
4,715,544
SBA loan pools
TOTALS
10,986
889,985
118,080
3,367,115
$ 81,476
$ 4,775,305
$ 1,382,815
$ 38,882,588
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, 2018, 6 debt securities with an unrealized loss for less than one year and 57 debt securities with an
unrealized loss for greater than one year depreciated approximately 3.2 percent from the Bank’s amortized cost basis. 34 of
the securities are secured by Federal agency mortgage backed securities or U.S. Treasury obligations and direct obligations of
U.S. Government agencies, 3 of the securities are corporate bonds, 15 are private-label collateralized mortgage obligations,
and 11 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.
During the year, the Bank transferred 29 municipal securities from held-to-maturity to available-for-sale. Based on changes
in the current rate environment, management elected this change in an effort to more effectively manage the investment
portfolio, including subsequently selling some securities that were formerly classified as held-to-maturity. The amortized cost
of the securities that were transferred totaled $14.5 million and the net unrealized loss related to these securities totaled
$608,000 on the date of transfer. This one was a one-time transfer, done in accordance with ASU 2017-02, and management
does not believe that it has tainted its held to maturity classification.
The Bank received $25,041,821 in proceeds from available-for-sale securities during the year ended December 31, 2018. As a
result, the Bank recognized $0 million in gross gains and $1,181,108 in gross losses for the year ended December 31, 2018.
Restricted investments consist of the following at December 31:
Federal Reserve Bank stock
Federal Home Loan Bank stock
Community Bankers Bank stock
TOTALS
2018
2017
$ 1,710,300
$ 1,571,300
1,299,700
66,000
896,200
66,000
$ 3,076,000
$ 2,533,500
FINANCIAL STATEMENTS
17
4. Loans Receivable
Loans receivable include the following at December 31:
Commercial and industrial
Real estate - commercial
Real estate - construction
Real estate - residential
Consumer and other
Subtotals
Deferred loan fees, net
TOTALS
2018
2017
$ 76,919,421
$ 64,153,229
191,543,985
202,399,170
32,335,250
38,721,639
67,991,855
81,752,643
25,506,991
20,754,304
394,297,502
407,780,985
(217,045)
(448,213)
$ 394,080,457
$ 407,332,772
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%.
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 2018
Allowance for Loan Losses
COMMERCIAL
& INDUSTRIAL
REAL ESTATE -
COMMERCIAL
REAL ESTATE -
CONSTRUCTION
REAL ESTATE -
RESIDENTIAL
CONSUMER
TOTAL
Beginning balance
$ 767,017
$ 2,464,708
$ 864,183
$ 368,319
$ 98,143
$ 4,562,370
Charge-offs
Recoveries
Provision
Reclassification1
Ending Balance
-
-
-
-
(191,453)
-
-
-
(165,249)
(356,702)
525
525
67,109
8,437
(220,624)
321,285
229,793
406,000
-
-
-
(39,000)
-
(39,800)
$ 834,126
$ 2,473,145
$ 452,106
$ 649,804
$ 163,212
$ 4,572,393
Individually evaluated for impairment
-
-
-
-
-
-
Collectively evaluated for impairment
834,126
2,473,145
452,106
649,804
163,212
4,572,393
1 The reclassification in the current year relates to the removal of a reserve that was originally posted for the mortgage loans held-
for-sale portfolio. This reserve is now recorded in Other Liabilities on the Balance Sheet
18
FINANCIAL STATEMENTS
Loans Receivable
Ending Balance
$ 76,919,421 $191,543,985
$ 32,335,250
$ 67,991,855 $ 25,506,991
$394,297,502
Individually evaluated for impairment $ 1,185,111 $ 3,185,852
$ 500,000
$ 2,824,302
-
$ 7,695,265
Collectively evaluated for impairment
75,734,310
188,358,133
31,835,250
65,167,553
25,506,991
386,602,237
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
738,488
2,464,708
864,183
115,000
253,319
-
143,529
98,143
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
An analysis of non-accrual and past due loans is as follows at December 31:
YEAR 2018
30-59 DAYS
PAST DUE
60-89 DAYS
PAST DUE
90 DAYS
OR MORE
PAST DUE
TOTAL
PAST DUE
CURRENT
TOTAL LOANS
RECEIVABLE
NONACCRUAL
LOANS
Commercial and industrial
$ 355,727 $ 220,352 $ - $ 576,079 $ 76,343,342 $ 76,919,421 $ 503,794
Real estate - commercial
-
Real estate - construction
1,575,669
Real estate - residential
853,813
-
-
-
-
-
-
-
191,543,985
191,543,985
-
500,000
2,075,669
30,259,581
32,335,250
500,000
-
-
853,813
67,138,042
67,991,855
1,808,766
-
25,506,991
25,506,991
-
$ 2,785,209 $ 220,352 $ 500,000 $ 3,505,561 $390,791,941 $394,297,502 $ 2,812,560
Consumer
TOTALS
YEAR 2017
Commercial and industrial $ - $ 125,625 $ - $ 125,625 $ 64,027,604 $ 64,153,229 $ 125,625
Real estate - commercial
Real estate - construction
Real estate - residential
Consumer
TOTALS
-
-
-
-
-
-
-
-
-
-
-
-
202,399,170
202,399,170
38,721,639
38,721,639
-
-
540,500
540,500
81,212,143
81,752,643
540,500
-
-
20,754,304
20,754,304
-
$ - $ 125,625 $ 540,500 $ 666,125 $407,114,860 $407,780,985 $ 666,125
FINANCIAL STATEMENTS
19
An analysis of impaired loans based on loan segment is as follows at December 31:
YEAR 2018
With no related allowance recorded:
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
RELATED
ALLOWANCE
FOR LOAN
LOSSES
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
Commercial and industrial
$ 1,185,111
$ 1,308,693
$ -
$ 1,195,950
$ 63,687
Real Estate - commercial
Real Estate - construction
Real Estate - residential
Consumer
With an allowance recorded:
Commercial and industrial
Real Estate - commercial
Real Estate - construction
Real Estate - residential
Consumer
TOTAL
3,185,852
3,185,852
500,000
500,000
2,824,302
2,848,237
-
-
-
-
-
-
-
-
-
-
-
-
Commercial and industrial
1,185,111
1,308,693
Real Estate - commercial
3,185,852
3,185,852
Real Estate - construction
500,000
500,000
Real Estate - residential
2,824,302
2,848,237
Consumer
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
3,231,715
500,000
3,289,832
147,545
16,389
199,735
-
-
-
-
-
-
-
-
-
-
-
-
1,195,950
3,231,715
500,000
3,289,832
-
63,687
147,545
16,389
199,735
-
$ 7,695,265
$ 7,842,782
$ -
$ 8,217,497
$ 427,356
YEAR 2017
With no related allowance recorded:
RECORDED
INVESTMENT
UNPAID
PRINCIPAL
BALANCE
RELATED
ALLOWANCE
FOR LOAN
LOSSES
AVERAGE
RECORDED
INVESTMENT
INTEREST
INCOME
RECOGNIZED
Commercial and industrial
$ -
$ -
$ -
$ -
$ -
Real Estate - commercial
Real Estate - construction
Real Estate - residential
Consumer
With an allowance recorded:
Commercial and industrial
Real Estate - commercial
Real Estate - construction
Real Estate - residential
Consumer
TOTAL
1,479,649
1,479,649
-
-
104,443
104,443
-
-
-
-
-
-
1,489,050
71,712
-
116,779
-
-
6,961
-
125,625
125,625
28,529
134,028
5,635
-
-
-
-
-
-
-
-
536,500
536,500
115,000
657,084
-
-
-
-
Commercial and industrial
125,625
125,625
28,529
134,028
Real Estate - commercial
1,479,649
1,479,649
-
-
-
-
1,489,050
-
640,943
640,943
115,000
773,863
-
-
-
-
$ 2,246,217
$ 2,246,217
$ 143,529
$ 2,396,941
$ 84,308
Real Estate - construction
Real Estate - residential
Consumer
20
FINANCIAL STATEMENTS
-
-
-
-
5,635
71,712
-
6,961
-
No additional funds are committed to be advanced in connection with the impaired loans.
One of the most significant factors in assessing the Bank’s loan portfolio is the risk rating. The Bank uses the following risk
ratings to manage the credit quality of its loan portfolio: pass, special mention, substandard, doubtful and loss. Special
mention loans are those loans that have potential weakness that deserves management’s close attention. These loans have
potential weaknesses that may result in deterioration of the repayment prospects for the loan or the Bank’s credit position at
some future date. Substandard loans are inadequately protected by current sound worth, paying capacity of the borrower,
or pledged collateral. Doubtful loans have all the inherent weaknesses in the substandard classification and collection or
liquidation in full is highly questionable. Loss loans are considered uncollectible and of such little value that continuance as an
active asset is not warranted. All other loans not rated are considered to have a pass rating.
An analysis of the credit quality indicators is as follows at December 31:
YEAR 2018
PASS
SPECIAL MENTION
SUBSTANDARD
DOUBTFUL
LOSS
Commercial and industrial
$ 74,858,816
$ 1,025,857
$ 1,034,748
$ -
$ -
Real estate - commercial
184,916,352
3,441,781
3,185,852
Real estate - construction
31,835,250
-
500,000
62,471,813
25,506,991
2,671,805
2,848,237
-
-
-
-
-
-
-
-
-
-
$ 379,589,222
$ 7,139,443
$ 7,568,837
$ -
$ -
Real estate - residential
Consumer
TOTALS
YEAR 2017
Commercial and industrial
$ 63,394,410
$ 633,194
$ -
$ 125,625
$ -
Real estate - commercial
199,175,861
1,743,660
1,479,649
Real estate - construction
38,721,639
Real estate - residential
Consumer
TOTALS
81,111,699
20,725,029
-
82,272
29,275
-
558,672
-
-
-
-
-
-
-
-
-
$ 403,128,638
$ 2,488,401
$ 2,038,321
$ 125,625
$ -
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, 2018 and December 31, 2017, the Bank had a recorded investment in troubled debt restructurings of
$534,405 and $230,068, respectively. The Bank allocated $0 and $28,529 of specific allowance for those loans at December
31, 2018 and December 31, 2017. The Bank modified three loans during the year ended December 31, 2018 which were
classified as TDRs. Concessions granted to borrowers include changes in interest rates, maturity dates and/or payment
amounts or some combination of each. There were two credits classified as a TDR in the prior year which defaulted during
the year ended December 31, 2018. These two credits were charged off in full and recognized through the allowance for loan
loss reserve.
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 $2,660,871 and $1,463,571 at December 31, 2018 and 2017, respectively. New
loans made to such related parties amounted to $3,106,500, and repayments amounted to $1,490,186 in 2018.
FINANCIAL STATEMENTS
21
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
2018
2017
$ 1,802,846
$ 1,475,882
1,452,819
1,181,317
18,720
185,303
240,760
118,560
3,459,688
3,016,519
(1,710,753)
(1,420,944)
NET BANK PREMISES AND EQUIPMENT
$ 1,748,935
$ 1,595,575
Depreciation and amortization of bank premises and equipment charged to expense amounted to $289,809 and $257,284 in
2018 and 2017, respectively.
6. Deposits
The following are time deposits maturing in years ending December 31:
2019
2020
2021
2022
2023
TOTAL
$ 122,156,615
44,246,614
28,289,152
5,744,181
1,855,749
$ 202,292,311
Time deposits in denominations that meet or exceed the FDIC minimum limit of $250,000 or more totaled $83,457,849 and
$66,371,688 at December 31, 2018 and 2017, respectively.
The Bank held related party deposits of approximately $6,442,635 and $7,083,000 at December 31, 2018 and 2017,
respectively.
7. Borrowings and Advances
The Bank’s borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $17.1 million and $10.4 million at December
31, 2018 and 2017, respectively. At December 31, 2018 and 2017, the weighted average rates on FHLB advances were 2.05%
and 1.77%, respectively. These advances were secured by a blanket collateral agreement with the FHLB pledging the Bank’s
portfolio of residential first mortgage loans with a collateral value of $79.4 million and $41.9 million.
FHLB advances are subject to prepayment penalties. During the year ended December 31, 2018 and 2017, the Company
prepaid no FHLB advances.
Callable advances are callable at the option of the FHLB. If an advance is called, the Bank has the option to pay off the
advance without penalty, re-borrow funds on different terms, or convert the advance to a three-month floating rate advance
tied to LIBOR. The Bank did not have any callable FHLB advances at December 31, 2018 or 2017.
Advances from the FHLB are summarized by year of maturity and weighted average interest rate at December 31, 2018:
2019
2020
2021
2022
TOTAL
22
FINANCIAL STATEMENTS
AMOUNT
WEIGHTED
AVERAGE RATE
$ 5,500,000
4,500,000
3,000,000
4,142,857
$ 17,142,857
2.37%
2.13%
1.34%
2.05%
8. Income Taxes
Year-end deferred tax assets and liabilities were due to the following:
2018
2017
Deferred tax assets
Allowance for loan losses
Unearned loan fees and costs, net
Accrued compensation
Non-accrual loan interest
Unrealized losses on securities
Stock options
Restricted stock
Net operating loss carryforward
Other
Deferred Tax Liabilities
Depreciation
Interest rate lock
Net deferred tax assets
Income tax expense (benefit) was as follows:
Current tax expense
Deferred tax expense (benefit)
Deferred tax asset adjustment for enacted change in tax rate
$ 852,944
$ 820,195
45,579
114,418
6,000
298,812
-
52,903
193,941
11,803
94,125
52,500
11,690
152,502
52,734
-
-
-
1,576,400
1,183,746
304,636
24,251
328,887
200,868
8,264
209,132
$ 1,247,513
$ 974,614
2018
$ 84,166
(126,589)
-
2017
$ 1,098,859
687,602
603,331
$ (42,423)
$ 2,389,792
Income tax expense for 2017 included a 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 was 34%. Effective January 1, 2018, the Bank’s tax rate is 21%.
Effective tax rates differ from the federal statutory rate of 21% for 2018 and 34% for 2017, which is applied to income before
income taxes due to the following:
Federal statutory rate times financial statement income
Effect of:
Tax-exempt income, net of disallowance
Earnings from bank-owned life insurance
Deferred tax asset adjustment for enacted change in tax rate
Stock compensation
Other
2018
$ 31,259
2017
$ 1,728,938
(111,618)
(13,266)
-
(69,659)
120,861
(138,966)
(19,183)
603,331
68,786
146,886
$ (42,423)
$ 2,389,792
9. Capital Requirements
The Bank is subject to various regulatory capital requirements administered by Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators
that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank’s capital amounts and classification under the prompt corrective action guidelines are also subject to
qualitative judgments by the regulators about components, risk weightings and other factors.
FINANCIAL STATEMENTS
23
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, 2018 and, 2017, that the Bank meets all the capital adequacy
requirements to which it is subject.
As of December 31, 2018, 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, 2018 and 2017 are as follows:
ACTUAL
FOR CAPITAL
ADEQUACY PURPOSES
MINIMUM TO BE WELL
CAPITALIZED UNDER
PROMPT CORRECTIVE
ACTION PROVISIONS
AMOUNT
RATIO
AMOUNT
RATIO
AMOUNT
RATIO
$64,810,831
15.85%
$32,712,769
8.00%
$40,890,961
10.00%
$60,238,439
14.73%
$24,534,577
6.00%
$32,712,769
8.00%
$60,238,439
14.73%
$18,400,932
4.50%
$26,579,125
6.50%
$60,238,439
12.16%
$19,821,838
4.00%
$24,777,298
5.00%
$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%
DEC. 31, 2018
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, 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)
10. Stock Option & Equity Plan
In 2007, the Bank established the 2007 stock option and equity plan (the Plan) for executives, other employees, officers,
directors and consultants. Shares have been reserved for issuance by the Bank upon the grant of stock options or restricted
stock awards. Shares issued 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 and 200,000 at the August
2018 and March 2016 annual meetings, respectively. The authorized and granted options under the Plan are as follows at
December 31, 2018:
2007 Plan
AUTHORIZED
GRANTED
1,075,280
979,761
VESTED
828,957
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, 2018, there was approximately $103,944 in unrecognized
compensation expense related to non-vested stock options that are expected to be recognized over a weighted average
24 FINANCIAL STATEMENTS
period of 0.77 years. At December 31, 2017, there was approximately $246,000 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, 2016
Grants
Exercised
Canceled or expired
OUTSTANDING, DECEMBER 31, 2017
Grants
Exercised
Canceled or expired
OUTSTANDING, DECEMBER 31, 2018
NUMBER OF
SHARES
WEIGHTED
AVERAGE
EXERCISE PRICE
698,392
42,186
(8,749)
(35,050)
696,779
-
(315,903)
(50,427)
330,449
$ 6.92
10.16
7.53
8.81
7.01
-
7.11
8.69
$ 6.67
There were no stock options granted during the year ended December 31, 2018. The weighted average remaining contractual
life of options outstanding as of December 31, 2018 is 4.00 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.
In 2018, 125,000 voting common shares of restricted stock were granted to two executives in connection with their overall
compensation plan. 50,000 shares were granted September 25, 2018 as part of a performance-based restricted stock
agreement at a value of $12.21 for the first 10,000 shares. All subsequent shares will be valued upon the determination of
future performance criteria. These restricted shares vest in accordance with tranches over five performance periods, March
15, 2019, March 15, 2020, March 15, 2021, March 15, 2022, and March 15, 2023. 50,000 shares were granted September
25, 2018 as part of a time-based restricted stock agreement at a value of $12.21. These restricted shares cliff vest over a five
year period beginning December 15, 2018. As of December 31, 2018, 10,000 of the time-based restricted shares have vested.
25,000 shares were granted October 1, 2018 as part of a performance-based restricted stock agreement at a value of $12.05
for the first 5,000 shares. All subsequent shares will be valued upon the determination of future performance criteria. These
restricted shares vest in accordance with tranches over the same five performance periods noted above.
For the years ended December 31, 2018 and 2017, the Bank recognized $382,592 and $225,837 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.
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.
FINANCIAL STATEMENTS 25
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 2.75% 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 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 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, 2018:
YEAR ENDING DECEMBER 31
2019
2020
2021
2022
2023
Thereafter
$ 889,986
912,570
863,428
701,143
682,420
513,999
$ 4,563,546
Rent expense amounted to $913,935 and $823,706 for the years ended December 31, 2018 and 2017, respectively.
12. Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in
the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on
the measurement date. U.S. GAAP requires that valuation techniques maximize the use of observable inputs and minimize the
use of unobservable inputs. U.S. GAAP also establishes a fair value hierarchy which prioritizes the valuation inputs into three
broad levels. Based on the underlying inputs, each fair value measurement in its entirety is reported in one of the three levels.
These levels are:
Level 1 – inputs to the valuation methodology are based upon unadjusted quoted prices for identical assets or liabilities in
active markets that the Bank has the ability to access.
Level 2 – inputs to the valuation methodology include: quoted prices for similar assets or liabilities in active markets, quoted
prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are
observable for the asset or liability, and market-corroborated inputs. If the asset or liability has a specified (contractual) term,
the Level 2 input must be observable for substantially the full term of the asset or liability.
Level 3 – inputs to the valuation methodology are unobservable and significant to the fair value measurement. Level 3
assets and liabilities measured at fair value are based on one or more of three valuation techniques (market, cost, or income
approach). The market approach evaluates prices and other relevant information generated by market transactions involving
identical or comparable assets or liabilities. The cost approach evaluates the amount that would be required to replace the
26
FINANCIAL STATEMENTS
service capacity of an asset (i.e., replacement cost). The income approach uses techniques that convert future amounts to a
single present amount based on market expectations (including present value techniques, option-pricing models, and lattice
models).
The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input
that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs
and minimize the use of unobservable inputs.
The following describes the valuation techniques used by the Bank to measure certain financial assets and liabilities recorded
at fair value on a recurring basis in the financial statements:
SECURITIES AVAILABLE-FOR-SALE:
Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted
market prices, when available (Level 1). If quoted market prices are not available, fair values are measured utilizing
independent valuation techniques of identical or similar securities for which significant assumptions are derived primarily
from or corroborated by observable market data. Third party vendors compile prices from various sources and may
determine the fair value of identical or similar securities by using pricing models that considers observable market data
(Level 2).
LOANS HELD-FOR-SALE:
The Bank originates fixed rate residential loans on a servicing released basis in the secondary market. Loans closed
but not yet settled with an investor, are carried in the Bank’s loans held for sale portfolio. These loans are fixed rate
residential loans that have been originated in the Bank’s name and have closed. Virtually all of these loans have
commitments to be purchased by investors at a locked-in price with the investors on the same day that the loan was
locked in with the Bank’s customers. Therefore, these loans present very little market risk for the Bank and are classified
as Level 2. The carrying amount of these loans approximates fair value.
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
2018
Available-for-sale securities
$ 48,204,339
$ -
$ 48,204,339
$ -
Loans held for sale
4,415,520
-
$ 4,415,520
-
$ 52,619,859
$ -
$ 52,619,859
$ -
2017
Available-for-sale securities
$ 61,989,669
$ -
$ 61,989,669
$ -
Loans held for sale
7,772,501
-
$ 7,772,501
-
$ 69,762,170
$ -
$ 69,762,170
$ -
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
FINANCIAL STATEMENTS
27
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
2018
Impaired loans
2017
Impaired loans
$ -
$ -
$ -
$ -
$ 518,596
$ -
$ -
$ 518,596
There were no financial assets measured at fair value on a non-recurring basis as of December 31, 2018. 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%
FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial
assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring
basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Bank.
Additionally, in accordance with ASU 2016-01, which the Bank adopted on January 1, 2018 on a prospective basis, the
Bank uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not
measured at fair value on a recurring basis.
FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2018 USING
CARRYING
AMOUNT
LEVEL 1
LEVEL 2
LEVEL 3
TOTAL
Financial assets
Cash and due from banks
$ 1,270,559
$ 1,270,559
$ -
$ -
$ 1,270,559
Interest bearing deposits with banks
14,376,684
14,376,684
Federal funds sold
-
Securities available-for-sale
48,204,339
Securities held-to-maturity
Loans held for sale
Loans receivable, net
-
4,415,520
389,508,064
-
-
-
-
-
Accrued interest receivable
1,229,534
1,229,534
-
-
48,204,339
-
4,415,520
-
-
Bank-owned life insurance
12,401,317
-
12,401,317
-
-
-
-
-
14,376,684
-
48,204,339
-
4,415,520
390,930,000
390,930,000
-
-
1,229,534
12,401,317
TOTAL FINANCIAL ASSETS
$471,406,017
$ 16,876,777
$ 65,021,176 $390,930,000
$472,827,953
Financial liabilities
Demand deposits
Time deposits
$198,439,454
$198,439,454
$ -
$ -
$198,439,454
Federal Home Loan Bank advances
17,142,857
202,292,311
-
-
201,319,000
17,170,803
Accrued interest payable
218,537
218,537
-
-
-
-
201,319,000
17,170,803
218,537
TOTAL FINANCIAL LIABILITIES $418,093,159
$198,657,991 $218,489,803
$ -
$417,147,794
28
FINANCIAL STATEMENTS
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
61,989,669
14,869,181
7,772,501
402,770,402
-
-
-
-
Accrued interest receivable
1,643,427
1,643,427
-
-
61,989,669
14,851,944
7,772,501
-
-
Bank-owned life insurance
2,338,146
-
2,338,146
-
-
-
-
-
33,936,870
127,000
61,989,669
14,851,944
7,772,501
398,360,000
398,360,000
-
-
1,643,427
2,338,146
TOTAL FINANCIAL ASSETS
$526,611,564
$ 36,871,665
$ 86,952,260 $398,360,000
$522,183,925
Financial liabilities
Demand deposits
Time deposits
$256,487,419
$256,487,419
$ -
$ -
$256,487,419
Federal Home Loan Bank advances
10,428,571
209,493,201
-
-
209,039,000
10,454,643
Accrued interest payable
162,749
162,749
-
-
-
-
209,039,000
10,454,643
162,749
TOTAL FINANCIAL LIABILITIES $476,571,940
$256,650,168 $219,493,643
$ -
$476,143,811
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
2018
2017
$ 71,394,000
$ 95,568,000
$ 2,446,000
$ 2,372,000
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.
The Bank had one financial letter of credit drawn during 2018. The total commitment for this letter of credit is $155,000. The
letter of credit is secured by a second deed of trust on owner-occupied real estate which is subordinate to a first deed of trust
held by the Bank. The Bank has not incurred any losses on its commitments in 2018 or 2017.
14. Deferred Benefits
The Bank has a contributory 401(k) savings plan covering substantially all employees, which allows eligible employees to
FINANCIAL STATEMENTS
29
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 $235,000 and $226,000 in 2018 and 2017 for employee service rendered in 2017
and 2016, respectively. There was no accrual for a discretionary contribution made during the year ended December 31, 2018.
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, 2016
$ (461,355)
$ (62,047)
$ (523,402)
Amortization of transferred securities, net of tax of $1,477
Reclassification for (gains) 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)
Unrealized gains (losses) net of tax of $413,173
(1,554,314)
Reclassification for (gains) losses on sales net of tax of $248,033
933,075
-
-
Amortization of transferred securities, net of tax of $18,830
-
70,836
(1,554,314)
933,075
70,836
BALANCE AT DECEMBER 31, 2018
$ (1,124,101)
$ -
$ (1,124,101)
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 2018 and 2017, the Bank obtained legal services from two separate law firms, for which one of its directors was a
partner.
30
FINANCIAL STATEMENTS
SHAREHOLDER & COMPANY INFORMATION
BOARD OF DIRECTORS
H. JASON GOLD
CHAIRMAN
JOHN T. ROHRBACK
VICE CHAIRMAN
CYNTHIA CARTER ATWATER
DIRECTOR
JOSEPH J. THOMAS
PRESIDENT AND CEO
ROBERT D. FALESE JR.
DIRECTOR
BRANDON C. PARK
DIRECTOR
LAUREN FRIEND MCKELVEY
DIRECTOR
EXECUTIVE OFFICERS & SENIOR LEADERSHIP TEAM
JOSEPH J. THOMAS
PRESIDENT AND CEO
SHAUN E. MURPHY
EXECUTIVE VICE PRESIDENT &
CHIEF OPERATING AND CREDIT OFFICER
RAJ MEHRA
EXECUTIVE VICE PRESIDENT &
CHIEF FINANCIAL OFFICER
RICHARD A. HUTCHISON
EXECUTIVE VICE PRESIDENT &
CHIEF MORTGAGE OFFICER
KATHLEEN S. CROSON
EXECUTIVE VICE PRESIDENT &
CHIEF BANKING OFFICER
SHAREHOLDER & COMPANY INFORMATION
31
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
Tuesday, May 28, 2019 – 1 p.m.
at The Freedom Bank of Virginia Corporate Headquarters
10555 Main Street, Suite 600
Fairfax, VA 22030
32 SHAREHOLDER & COMPANY INFORMATION
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CHANTILLY
FAIRFAX
RESTON
VIENNA
4500 Daly Drive, Suite 240
Chantilly, VA 20151
10555 Main Street, Suite 100
Fairfax, VA 22030
11700 Plaza America Drive, Suite 110
Reston, VA 22190
502 Maple Avenue West
Vienna, VA 22180
571-395-4000
703-242-5300
703-663-2300
703-667-4170
MORTGAGE DIVISION
PRINCE WILLIAM COUNTY
4211 Pleasant Valley Road
Chantilly, VA 20151
703-766-6400
703-667-4166
OTCQX : FDVA
00DFDDF