Freedom Bank of Virginia
Annual Report 2021

Plain-text annual report

2021 ANNUAL REPORT Business Banking • Personal Banking • Mortgage Banking freedom.bank 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 RETURN ON AVERAGE EQUITY (%) NET INCOME ($M) % 16 14 12 10 8 6 4 2 0 13.60% 10.83% 5.32% 4.39% 0.34% 2017 2018 2019 2020 2021 12 10 8 $M 6 4 2 0 $10.7 0 . 5 % C A G R 4 $7.4 $2.7 2019 2020 2021 $2.9 2017 $0.2 2018 freedom.bank DFDDF TABLE OF CONTENTS 02 A LETTER TO OUR SHAREHOLDERS 04 INDEPENDENT AUDITOR’S REPORT 06 CONSOLIDATED FINANCIAL STATEMENTS 06 CONSOLIDATED BALANCE SHEETS 08 CONSOLIDATED STATEMENTS OF OPERATIONS 09 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 10 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY 11 CONSOLIDATED STATEMENTS OF CASH FLOWS 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47 SHAREHOLDER & COMPANY INFORMATION A LETTER TO OUR SHAREHOLDERS March 11, 2022 Dear Shareholders: On behalf of our directors and officers, we are pleased to present our 2021 Annual Report which highlights Freedom Financial Holdings, Inc.’s outstanding financial performance during the past year. As the world continued to grapple with the lingering effects of the Coronavirus pandemic, the company used both innovation and discipline to deliver solid results for our shareholders. Remaining rooted in these keys tenets helped propel us toward record financial results in 2021. Freedom achieved net income for the full year 2021 of $10,727,961 or $1.46 per diluted share compared to net income of $7,364,477 or $1.01 per diluted share for the full year 2020. We ended the year with 45.7 % growth in net income on 14.3% growth in total assets to $877 million. This helped increase our tangible book value per share by 14.9% to $11.59. Beyond these record financial results, 2021 was filled with important milestones, including celebrating The Freedom Bank of Virginia’s 20th anniversary and completing a reorganization in which Freedom Financial Holdings, Inc. became the parent holding company of The Freedom Bank of Virginia. We also executed a $20 million subordinated debt issuance to provide the Bank additional capacity for growth. The Freedom Bank of Virginia now has five unique areas of business that provide a mix of revenues which are complementary in a very dynamic economy. Our Commercial Banking team, comprised of 11 bankers and portfolio managers, focuses on a variety of commercial & industrial enterprises, as well as commercial real estate markets. From our clients in this area of business, we were able to increase gross portfolio loans1 by 26.9%, with commercial and industrial loans representing 21% of gross portfolio loans as of 12/31/21. Our Community Banking group includes five sales offices across Northern Virginia that have driven strong core deposit growth with non-interest deposit balances representing 32.0% of total deposits as of 12/31/2021. Our cost of funds was 0.33 % for Q4 2021 and 0.40 % for FY 2021. Treasury Services includes a team of five professionals providing state-of-the-art technology-focused banking services to our business clients. Our new SBA Banking team has grown to seven experienced SBA Bankers offering SBA 7(a), and 504, USDA, and Bureau of Indian Affairs loans to meet the needs of Freedom’s clients in the DC Region and new clients throughout the East Coast. Our high performing Mortgage Banking team comprised of 14 mortgage loan officers and dedicated operations team, generated residential loan production of $336.8 million in 2021 through an extensive product offering driving purchase volume, including VA, FHA, VHDA, and USDA mortgages. To enable us to continue this growth, we recently promoted a cohort of next-level leaders providing a flywheel of talent to support our business lines with industry leading technology, marketing, financial reporting, human resources and to scale our operations in loans, deposits, residential mortgage and government guaranteed lending. This ensures that we have a line of sight for succession as we expand our reach and, more importantly, depth to scale the organization for our next chapter of growth. We have developed a technology enabled business model to better serve our clients. Our operations are not burdened with legacy systems and bureaucracy often found in larger banks. Instead, we have worked hard to build capacity to curate capabilities that align with our customers’ needs to enable speed to market. We have partnerships with over 20 “fintech” companies that are enabling us to provide best -in-class products and services. Our unique mix of diverse and synergistic business units, talented colleagues, and differentiated technology is driving our success and was recognized by Independent Banker, the magazine of the Independent Community Bankers of 1 Portfolio loans are loans held-for investment excluding Payment Protection Program loans. 02 A LETTER TO OUR SHAREHOLDERS America, who named the Bank the #6 ranked Commercial Bank in the United States. This distinguished recognition was based on the strength of our competitive banking services and operational efficiencies. Our model of focusing on entrepreneurs, business owners, and private real estate investors with talented bankers and leading technology continues to provide a runway for success. As an extension of our commitment to helping small businesses and promoting more inclusion in the financial system, Freedom teamed with other funding sponsors and the Community Business Partnership, Inc. to create the Nova Freedom Fund. This revolving loan fund helps provide financing and technical assistance for minorities and entrepreneurs of color in Northern Virginia. Our efforts were recognized by the American Bankers Association Foundation which awarded Freedom – the sole award winner in Virginia – an Honorable Mention in its 2021 Community Commitment Awards for our economic inclusion work. To advance our important efforts in the community, the Board has approved a new mission and strategy for the Freedom Foundation to focus on economic inclusion. The Foundation will receive donations from the Company and our employees, as well as coordinate an annual event to leverage the platform to promote economic inclusion in the communities we serve. Internally, the Company has a dedicated commitment to Diversity, Equity, Belonging and Inclusion led by the Freedom DE&I Committee with intentional training and coaching to ensure every employee flourishes. We have launched a company-wide racial equity education process lead by an outside expert for all employees and the Board. The Company continues to evaluate ways to build, partner or purchase financial technologies to reflect the changing industry dynamics and customer expectation. We implemented Finicity in our Residential Mortgage business to enable mobile loan applications and launched Spark in Small Business Lending to do the same. We integrated invoicing and payments via Autobooks on our digital banking platform. We executed a partnership with BizEquity to offer free business valuation to our clients and a new Business Valuation Loan product to commercial clients utilizing BizEquity’s state-of-the-art valuation platform. These unique services strengthen existing relationships and will attract new clients from a wide range of industries. As we reflect on the milestones and success of 2021, we are energized for the year ahead. We have undergone a series of organizational changes that are centered around increasing client focus and employee empowerment—two critical elements to fuel the next stage of Freedom Bank’s growth and profitability. With so much change in the world around us, as digital engagement with clients and virtual work by teammates race forward, the Company has begun designing and implementing new digital strategies to meet clients where they are and bank them how they wish to be served. Our IDEAS Core Values - Innovation, Discipline, Experience, Attitude and Service - will continue to guide the Bank in this next chapter. As the Company continues to become larger and more complex our focus remains steadfast and straightforward: we will work as one team to serve our clients with simplicity and speed. Our culture has always placed a premium on sales and service and that will continue to fuel and drive us toward ongoing success and increased shareholder value. Sincerely, H. JASON GOLD Chairman of the Board JOSEPH J. THOMAS, CFA President & CEO A LETTER TO OUR SHAREHOLDERS 03 INDEPENDENT AUDITOR’S REPORT Report of Independent Registered Public Accounting Firm To the Stockholders and Board of Directors of Freedom Financial Holdings, Inc. Fairfax, Virginia Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm Opinion on the Financial Statements Crowe LLP Independent Member Crowe Global Crowe LLP Independent Member Crowe Global Basis for Opinion Opinion on the Financial Statements Stockholders and the Board of Directors of Freedom Financial Holdings, Inc. Fairfax, Virginia We have audited the accompanying consolidated balance sheets of Freedom Financial Holdings, Inc. (the "Company") Stockholders and the Board of Directors of Freedom Financial Holdings, Inc. as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in Fairfax, Virginia stockholders’ equity, and cash flows for the year then ended, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial Opinion on the Financial Statements position of the Company as of December 31, 2021, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. We have audited the accompanying consolidated balance sheets of Freedom Financial Holdings, Inc. (the We have audited the accompanying consolidated balance sheets of Freedom Financial Holdings, Inc. (the "Company") as of December 31, 2021, the related consolidated statements of operations, comprehensive "Company") as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes Basis for Opinion (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of in all material respects, the financial position of the Company as of December 31, 2021, and the results of These financial statements are the responsibility of the Company's management. Our responsibility is to express an its operations and its cash flows for the year then ended, in conformity with accounting principles generally its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. accepted in the United States of America. opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with Basis for Opinion 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. These financial statements are the responsibility of the Company's management. Our responsibility is to These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audit. We are a public accounting express an opinion on the Company's financial statements based on our audit. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with auditing required to be independent with respect to the Company in accordance with the U.S federal securities laws required to be independent with respect to the Company in accordance with the U.S federal securities laws standards generally accepted in the United States of America. Those standards require that we plan and perform the and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal auditing standards generally accepted in the United States of America. Those standards require that we auditing standards generally accepted in the United States of America. Those standards require that we control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control plan and perform the audit to obtain reasonable assurance about whether the financial statements are free plan and perform the audit to obtain reasonable assurance about whether the financial statements are free over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we control over financial reporting. Accordingly, we express no such opinion. engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of 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. expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, Accordingly, we express no such opinion. Accordingly, we express no such opinion. whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also Our audit included performing procedures to assess the risks of material misstatement of the financial Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such statements, whether due to error or fraud, and performing procedures that respond to those risks. Such included evaluating the accounting principles used and significant estimates made by management, as well as evaluating procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our financial statements. Our audit also included evaluating the accounting principles used and significant financial statements. Our audit also included evaluating the accounting principles used and significant opinion. estimates made by management, as well as evaluating the overall presentation of the financial statements. 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 believe that our audits provide a reasonable basis for our opinion. Other Matter Other Matter Other Matter The financial statements of The Freedom Bank of Virginia for the year ended December 31, 2020, were audited by other The financial statements of The Freedom Bank of Virginia for the year ended December 31, 2020, were The financial statements of The Freedom Bank of Virginia for the year ended December 31, 2020, were auditors, who expressed an unmodified opinion on those statements on March 9, 2021. As disclosed in Note 1 of the financial audited by other auditors, who expressed an unmodified opinion on those statements on March 9, 2021. audited by other auditors, who expressed an unmodified opinion on those statements on March 9, 2021. statements, a reorganization occurred during 2021 from The Freedom Bank of Virginia to Freedom Financial Holdings, Inc. As disclosed in Note 1 of the financial statements, a reorganization occurred during 2021 from The Freedom As disclosed in Note 1 of the financial statements, a reorganization occurred during 2021 from The Freedom Bank of Virginia to Freedom Financial Holdings, Inc. Bank of Virginia to Freedom Financial Holdings, Inc. 04 INDEPENDENT AUDITOR’S REPORT (Continued) (Continued) Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Loan Losses – Qualitative Factors As more fully described in Note 1 and Note 4 to the consolidated financial statements, the Company’s allowance for loan losses consists of two basic components: the specific allowance and the pooled (“general”) allowance. The general component is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent five years. The actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: 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). The principal consideration for our determination that auditing the economic factors applied to adjust historical loss experience (qualitative factors) in the allowance for loan losses calculation is a critical audit matter is the high degree of subjectivity involved in management’s assignment of allowance factors based on management’s judgment associated with each allowance factor, which resulted in significant audit effort and a high degree of auditor judgment. Our audit procedures to address the critical audit matter related to the allowance for loan losses qualitative factors included the following substantive testing: • Evaluating the relevance and reliability of the underlying objective data used to derive the qualitative factors. • Evaluating the reasonableness of management’s adjustments to historical loss experience based on their selected qualitative factors. • Performing substantive analytical procedures to evaluate changes that occurred in the allowance for loan losses for loans collectively evaluated for impairment including evaluating for directional consistency and obtaining evidence for significant changes. We have served as the Company's auditor since 2021. Washington, D.C. March 11, 2022 Crowe LLP INDEPENDENT AUDITOR’S REPORT 05 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31 2021 and 2020 ASSETS Cash and due from financial institutions Interest-bearing deposits with banks Cash and Cash Equivalents Securities available-for-sale 2021 $ 2,536,450 2020 $ 1,792,660 31,696,891 25,543,295 34,233,341 27,335,955 171,532,394 97,188,125 Securities held to maturity (fair value 2021 - $17,995,774; 2020 - $15,937,655) 18,012,874 16,132,367 Restricted stock investments Loans held for sale Loans receivable Allowance for loan losses Net Loans Premises and equipment, net Accrued interest receivable Deferred tax asset, net Bank-owned life insurance Right-of-use asset, net Other assets TOTAL ASSETS 3,321,250 3,607,800 13,297,125 45,047,711 602,369,321 550,426,851 (6,486,120) (5,454,925) 595,883,201 544,971,926 1,139,204 1,298,409 2,466,712 2,868,868 1,631,115 1,154,078 24,579,879 17,035,214 2,704,888 3,258,817 7,870,617 7,145,687 $876,672,600 $767,044,957 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. 06 CONSOLIDATED FINANCIAL STATEMENTS LIABILITIES Deposits Demand deposits Non-interest bearing Interest bearing Savings deposits Time deposits Total Deposits Federal Home Loan Bank advances PPP liquidity facility advances Subordinated debt, net of issuance costs Accrued interest payable Lease liability Other liabilities TOTAL LIABILITIES Commitments and contingent liabilities - See Note 1 STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding, 2021 and 2020 Common stock, $0.01 par value, 25,000,000 shares authorized: 23,000,000 shares voting and 2,000,000 shares non-voting. Voting Common Stock: 6,676,545 and 6,610,647 shares issued and outstanding at December 31, 2021 and 2020, respectively (includes 86,788 and 100,002 unvested shares, respectively) Non-Voting Common Stock: 673,000 shares issued and outstanding at December 31, 2021 and 2020, respectively Additional paid-in capital Accumulated other comprehensive income, net Retained earnings Total Stockholders’ Equity 2021 2020 $ 222,167,095 $ 192,987,984 300,361,979 176,424,255 5,841,800 2,962,303 173,322,527 176,114,292 701,693,401 548,488,834 29,035,714 30,071,429 32,055,915 101,951,020 19,616,869 - 294,237 480,816 2,823,885 3,347,075 6,993,855 9,247,507 $ 792,513,876 $ 693,586,681 - - 65,898 65,106 6,730 6,730 59,884,615 59,223,538 651,272 1,340,654 23,550,209 12,822,248 84,158,724 73,458,276 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 876,672,600 $ 767,044,957 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED FINANCIAL STATEMENTS 07 CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended December 31 2021 and 2020 INTEREST INCOME Interest and fees on loans Interest on investment securities Taxable Tax-exempt Interest on deposits with banks Total Interest Income INTEREST EXPENSE Interest on deposits Interest on borrowings Total Interest Expense Net Interest Income PROVISION FOR LOAN LOSSES Net Interest Income After Provision for Loan Losses NON-INTEREST INCOME Gain on sale of mortgage loans Gain on sale of SBA-guaranteed loans Gain on sale of investment securities Service charges and other income Loan servicing income Swap fee income Increase in cash surrender value of bank-owned life insurance Bank-owned life insurance settlement income Total Non-Interest Income NON-INTEREST EXPENSES Officer 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 2021 $ 28,335,210 2020 $ 22,133,659 2,607,476 1,902,627 528,259 86,903 386,033 109,557 31,557,848 24,531,876 2,275,780 766,060 3,041,840 4,238,596 824,708 5,063,304 28,516,008 19,468,572 839,000 1,492,000 27,677,008 17,976,572 7,085,806 12,296,296 437,825 5,706 1,456,600 192,413 - 46,703 1,805,228 - - 657,712 544,665 - 494,403 144,810 9,723,015 15,445,152 16,341,245 16,233,421 1,232,056 1,194,320 662,050 267,583 1,365,057 1,181,347 329,059 778,069 1,141,200 846,850 735,374 196,442 1,298,943 1,012,601 278,602 725,466 1,952,049 711,503 24,144,516 24,338,721 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. 08 CONSOLIDATED FINANCIAL STATEMENTS INCOME BEFORE INCOME TAXES INCOME TAX EXPENSE NET INCOME 2021 2020 13,255,507 9,083,003 2,527,546 1,718,526 $ 10,727,961 $ 7,364,477 EARNINGS PER COMMON SHARE – BASIC $ 1.47 $ 1.02 EARNINGS PER COMMON SHARE – DILUTED $ 1.46 $ 1.01 WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – DILUTED 7,316,505 7,247,895 7,363,536 7,278,705 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years Ended December 31 2021 and 2020 Net Income Other Comprehensive Income: Unrealized gains/losses on securities: Unrealized holdings gain/(loss) arising during the period Reclassification adjustment for losses (gains) included in net income Tax effect Net of Tax Unrealized gains/losses on cash flow hedge: Unrealized holding gain/(loss) Reclassification adjustment for losses (gains) included in net income Tax effect Net of Tax Total Other Comprehensive Income (Loss) 2021 2020 $ 10,727,961 $ 7,364,477 (1,551,958) 1,871,106 (5,706) (46,703) 360,284 (400,997) (1,197,380) 1,423,406 663,273 (68,561) - (155,275) 507,998 - 15,083 (53,478) (689,382) 1,369,928 COMPREHENSIVE INCOME $ 10,038,579 $ 8,734,405 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED FINANCIAL STATEMENTS 09 CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY Years Ended December 31 2021 and 2020 Voting and Non-Voting SHARES OF COMMON STOCK COMMON STOCK ADDITIONAL PAID-IN CAPITAL ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) RETAINED EARNINGS TOTAL STOCKHOLDERS' EQUITY BALANCE, JAN. 1, 2020 7,100,546 $ 71,005 $58,526,913 $ (29,274) $ 5,457,771 $ 64,026,415 Net income Other comprehensive income Stock options exercised Restricted stock - vested, net of shares withheld Stock-based compensation - stock options Stock-based compensation - restricted stock - - 49,896 33,203 - - - - 499 332 - - - - 286,403 (332) 14,498 396,056 - 7,364,477 7,364,477 1,369,928 - - - - - - - - - 1,369,928 286,902 - 14,498 396,056 BALANCE, DEC. 31, 2020 7,183,645 $ 71,836 $59,223,538 $ 1,340,654 $12,822,248 $ 73,458,276 Effect for reorganization Net income Other comprehensive loss Stock options exercised Restricted stock - vested, net of shares withheld Stock-based compensation - stock options Stock-based compensation - restricted stock - - - 33,264 45,848 - - - - - 333 459 - - - - - - - (689,382) 198,253 (459) 615 462,668 - - - - - - 10,727,961 10,727,961 - - - - - (689,382) 198,586 - 615 462,668 BALANCE, DEC. 31, 2021 7,262,757 $ 72,628 $59,884,615 $ 651,272 $23,550,209 $ 84,158,724 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. 10 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2021 and 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operating activities: Provision for loan losses Depreciation and amortization of premises and equipment Net amortization of available-for-sale securities Deferred income tax benefit Net realized gains on sales of investment securities Net gain on sale of mortgage loans Net gain on sale of SBA guaranteed loans Loans held for sale originated Proceeds from the sale of loans held for sale Proceeds from the sale of SBA loans Stock-based compensation expense Loss on disposition of premises and equipment Subordinated debt amortization expense Earnings on company-owned life insurance Repayment of operating lease liabilities (Increase) decrease in: Accrued interest receivable Other assets Increase (decrease) in: Accrued interest payable Other liabilities Net Cash Provided (Used) by Operating Activities 2021 $ 10,727,961 2020 $ 7,364,477 839,000 186,309 1,207,356 (272,026) (5,706) 1,492,000 254,675 913,055 (682,296) (46,703) (7,085,806) (12,296,296) (437,825) - (336,806,440) (469,549,472) 376,442,023 447,655,668 3,767,920 463,283 - 6,494 (544,665) 30,739 - 410,554 33,220 - (494,403) 35,672 402,156 (724,930) (1,590,831) (840,799) (186,579) 47,230 (1,590,381) 2,307,478 46,418,883 (24,986,771) NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED FINANCIAL STATEMENTS 11 CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2021 and 2020 CASH FLOWS FROM INVESTING ACTIVITIES 2021 2020 Available-for-sale securities: Proceeds from sales Maturities, prepayments and calls Purchases Held-to-maturity securities: Maturities, prepayments and calls Purchases Sale of restricted stock investments, net Loan originations (not including PPP), net PPP loan origination PPP loan payments SBA loan origination, net Purchased loans, net of payments Acquisition of premises and equipment Purchase of company-owned life insurance Proceeds from settlement of BOLI policy Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits, net Advances from the Federal Home Loan Bank Repayment of advances from the Federal Home Loan Bank $ 1,437,181 $ 4,798,905 31,665,477 26,101,185 (110,206,241) (77,275,251) 8,404,493 4,918,581 (10,285,000) (21,050,948) 286,550 144,950 (81,114,911) (37,778,879) (53,887,807) (110,050,844) 122,747,732 8,835,469 (3,624,581) - (39,999,994) (17,850,300) (27,104) (105,769) (7,000,000) (4,000,000) - 242,794 (141,604,205) (223,070,107) $ 153,204,567 $ 153,278,218 15,000,000 35,000,000 (16,035,715) (40,785,714) Advances from the Payment Protection Plan Liquidity Facility (“PPPLF”) 53,887,807 110,050,844 Repayment of advances from the PPPLF Proceeds from subordinated debt, net of issuance costs Proceeds from stock options Net Cash Provided in Financing Activities (123,782,912) (8,099,824) 19,610,375 - 198,586 286,902 102,082,708 249,730,426 Net Increase in Cash and Cash Equivalents 6,897,386 1,673,548 Cash and Cash Equivalents, Beginning of Year 27,335,955 25,662,407 CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,233,341 $ 27,335,955 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. 12 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31 2021 and 2020 SUPPLEMENTAL NONCASH DISCLOSURES 2021 2020 Unrealized gain (loss) on securities available-for-sale, net $ (1,557,664) $ 1,824,403 Loans transferred (to)/from held-for-sale from/to portfolio $ (799,191) $ 799,191 Right-of-use assets obtained in exchange for lease liabilities $ 372,153 $ 1,182,317 Unrealized gain (loss) on cash flow derivative $ 663,273 $ (68,561) Unfunded commitment on limited partnership investments $ 3,033,013 $ 4,361,698 SUPPLEMENTAL INFORMATION Cash paid during the year for interest Cash paid during the year for income taxes $ 3,228,419 $ 5,016,075 $ 3,400,000 $ 1,825,000 NOTE: The Notes to Consolidated Financial Statements are an integral part of these statements. CONSOLIDATED FINANCIAL STATEMENTS 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 AND 2020 1. Nature of Operations and Summary of Significant Accounting Policies NATURE OF OPERATIONS Freedom Financial Holdings, Inc. (the “Company”) is a holding company headquartered in Fairfax, Virginia. The Company is the parent company of its wholly-owned subsidiary, The Freedom Bank of Virginia (the “Bank”). The Bank subsidiary is a state-chartered bank and a member of the Federal Reserve. It is subject to the rules and regulations of the Virginia State Banking Commission, the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”). The Company provides banking services at its branch offices in Vienna, Fairfax, Chantilly, Reston and Manassas, Virginia, and serves customers primarily in the Northern Virginia area. Additionally, the Company has a mortgage division located in Chantilly, Virginia and a small business lending division in Harrison, New York. The Company was incorporated on August 18, 2021, by and at the direction of the board of directors of the Bank, for the sole purpose of acquiring the Bank and serving as the Bank’s parent bank holding company pursuant to a corporate reorganization transaction (the “Reorganization”). On September 21, 2021, the Bank entered into an Agreement and Plan of Reorganization (the “Reorganization Agreement”) with the Company and Freedom Merger Sub, Inc. (the “Merger Sub”), a wholly-owned subsidiary of the Company, pursuant to which the Reorganization would be effected. Effective at 12:01 a.m. (the “Effective Time”) on November 1, 2021, under the terms of the Reorganization Agreement and pursuant to Section 13.1-719.1 of the Virginia Stock Corporation Act ( the “VSCA”), the Bank merged with the Merger Sub and survived such merger as a wholly-owned subsidiary of the Company. Prior to the Effective Time, the Company had no material assets and had not conducted any business or operations except for activities related to the Company’s formation and the Reorganization. At the Effective Time, under the terms of the Reorganization Agreement and pursuant to Section 13.1-719.1 of the VSCA, each of the outstanding shares of the Bank’s common stock, par value $0.01 per share, formerly held by its shareholders was converted and exchanged for one newly issued share of the Company’s common stock, par value $0.01 per share, and the Bank became the Company’s wholly-owned subsidiary. The shares of the Company’s common stock issued to the Bank’s shareholders were issued without registration under the Securities Act of 1933, as amended (the “Act”), pursuant to the exemption from registration provided by Section 3(a)(12) of the Act. Pursuant to Section 13.1-719.1 of the VSCA, the Reorganization did not require approval of the Bank’s shareholders. In the Reorganization, each shareholder of the Bank received securities of the same class, having substantially the same designations, rights, powers, preferences, qualifications, limitations and restrictions, as those that the shareholder held in the Bank, and the Company’s current shareholders own the same percentages of its common stock as they previously owned of the Bank’s common stock. Prior to the Effective Time, the Bank’s common stock was registered with OTCQX. Following the Reorganization, there were no changes to reporting requirements and/or the ticker symbol under which the Company stock trades. PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of Freedom Financial Holdings, Inc. and its wholly-owned subsidiary. All significant intercompany transactions have been eliminated in consolidation. RECLASSIFICATION Amounts in prior years’ period financial statements and footnotes are reclassified whenever necessary to conform to the current year’s presentation. Reclassifications had no material effect on prior year net income or shareholders’ equity. 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 consolidated financial statements, and the reported 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amounts of revenue and expenses during the reporting period. Significant estimates affecting the Company’s consolidated 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. OPERATING SEGMENTS While the chief decision-makers monitor the revenue streams of the various products and services, operations are managed and financial performance is evaluated on a Company-wide basis, and operating segments are aggregated into one as operating results for all segments are similar. Accordingly, all of the financial service operations are considered by management to be aggregated into one reporting operating segment. CASH AND CASH EQUIVALENTS The Company maintains interest bearing deposits with other institutions. Interest bearing deposits are valued at cost. Interest income is recorded as interest on deposits with banks. INVESTMENT SECURITIES Investment securities are classified as either held-to-maturity, available-for-sale or trading securities. In determining such classification, securities that the Company 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 through the earliest of the call date, where applicable, or the investment’s maturity date. 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. RESTRICTED STOCK INVESTMENTS 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 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 Company 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. LOANS AND LOAN FEES Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are stated at the principal amount outstanding, less the allowance for loan losses and net deferred loan fees. Interest on loans is generally computed using the simple interest method. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method. Amortization of deferred loan fees is discontinued when a loan is placed on non-accrual status. The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days delinquent, unless the credit is well secured and in process of collection. Other personal loans are typically placed on nonaccrual status or charged off no later than 180 days past due. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on non-accrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15 INTEREST RATE LOCK COMMITMENT The Company enters into interest rate lock commitments (IRLCs) to originate residential mortgage loans for sale in the secondary market whereby the interest rate on the loan is determined prior to funding. The period of time between issuance of a rate lock commitment and closing and sale of the loan generally ranges from 15 to 75 days. The IRLCs with customers are considered derivative financial instruments. The Company recognizes derivative financial instruments at fair value as either an other asset or other liability on the balance sheet. Because the IRLCs are not designated as hedging instruments, adjustments to reflect unrealized gains and losses resulting from changes in fair value of the IRLCs are reported as noninterest income. 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 Company 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 general component covers loans that are collectively evaluated for impairment. Large groups of smaller balance homogeneous loans, such as consumer and residential real estate loans, are collectively evaluated for impairment, and accordingly, they are not included in separately identified impairment disclosures. The general component is determined by portfolio segment and is based on the actual loss history experienced by the Company over the most recent five years. The actual loss experience is supplemented with other economic factors based on the risks present for each portfolio segment. These economic factors include consideration of the following: 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). PREMISES AND EQUIPMENT 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 Company amortizes software over three years using the straight-line method. Expenditures for maintenance, repairs and improvements under $1,000 are charged to earnings. When 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. SERVICING RIGHTS When loans are sold with servicing retained, servicing rights are initially recorded at fair value with the income statement effect recorded in gains on sales of loans. Fair value is based on a valuation model that calculates the present value of estimated future net servicing income. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying loans. Servicing rights are evaluated for impairment based upon the fair value of the rights are compared to the carrying amount. Servicing fee income, which is reported on the income statement as Loan Servicing Income, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal; or a fixed amount per loan and are recorded as income when earned. Servicing fees totaled $192,413 and $0 for the years ended December 31, 2021 and 2020, respectively. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Company had no other real estate owned at December 31, 2021 and 2020. BANK-OWNED LIFE INSURANCE The Company has entered into bank-owned single premium life insurance policies that are maintained by three counterparties. Under the bank-owned life insurance policies, executives or other key individuals are the insured and the Company 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 Company monitors the financial strength and condition of both counterparties. DERIVATIVES At the inception of a derivative contract, the Company designates the derivative as one of three types based on the Company’s intentions and belief as to the likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value hedge”), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”), or (3) an instrument with no hedging designation (“stand-alone derivative”). For a fair value hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings as fair value changes. For a cash flow hedge, the gain or loss on the derivative is reported in other comprehensive income and is reclassified to earnings in the same periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives that do not qualify for hedge accounting are reported currently in earnings, as non-interest income. Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest income or interest expense, based on the item being hedged. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income. Cash flows on hedges are classified in the cash flow statement the same as cash flows of the items being hedged. The Company formally documents the relationship between derivatives and hedged items, as well as the risk-management objective and the strategy for undertaking hedge transactions at the inception of the hedging relationship. The documentation includes linking fair value or cash flow hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivative instruments that are used are highly effective in offsetting changes in fair values or cash flows of the hedged items. The Company discontinues hedge accounting when it determines that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate. When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded as non-interest income. When a fair value hedge is discontinued, the hedged asset or liability is no longer adjusted for changes in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a cash flow hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income are amortized into earnings over the same periods which the hedged transactions will affect earnings. The Company is exposed to losses if a counterparty fails to make its payments under a contract in which the Company is in the net receiving position. The Company anticipates that the counterparties will be able to fully satisfy their obligations under the agreements. All the contracts to which the Company is a party settle monthly or quarterly. In addition, the Company obtains collateral above certain thresholds of the fair value of its hedges for each counterparty based upon their credit standing and the Company has netting agreements with the dealers with which it does business. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 STOCKHOLDERS' EQUITY 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. Provisions include that such conversion must (a) be permitted by guidance and policies established by the Board of Governors of the Federal Reserve System as applicable and in effect at the time of transfer and (b) would not cause or result in the holder of such non-voting common stock, together with any other holder (a “Related Holder”) of the Corporations capital stock, to own, control, or have the power to vote 10% or more of the voting common stock outstanding at any time without giving effect to any reductions in the percentage of voting common stock owned, controlled or held by such holder and any Related Holder so resulting from transfers of the voting common stock to third parties. 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 securities and qualifying derivative investments. INCOME TAXES Income tax expense is the total of the current year income tax due or refundable and the change in deferred tax assets and liabilities. Deferred tax assets and liabilities are the expected future tax amounts for the temporary differences between carrying amounts and tax bases of assets and liabilities, computed using enacted tax rates. A valuation allowance, if needed, reduces deferred tax assets to the amount expected to be realized. A tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. The Company recognizes interest and/or penalties related to income tax matters in other operating expense. 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 Company. Potential common shares that may be issued by the Company 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. Average number of common shares outstanding Effect of dilutive options Average number of common shares outstanding used to calculate diluted earnings per common share 2021 2020 7,316,505 7,247,895 47,031 30,810 7,363,536 7,278,705 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There were no antidilutive options for the year ended December 31, 2021. Stock options for 22,734 shares of common stock were not considered in computing diluted earnings per common share for the year ended December 31, 2020 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 Company recognizes the cost of employee services received in exchange for an award of equity instruments in the consolidated financial statements over the period the employee is required to perform the services in exchange for the award (presumptively the vesting period). The Company 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 Cash and cash equivalents include cash, deposits with other financial institutions with maturities fewer than 90 days, and federal funds sold. Net cash flows are reported for customer loan and deposit transactions and interest bearing deposits in other financial institutions. The Freedom Bank of Virginia periodically has bank deposits, including short-term investments, in excess of Federally insured limits. COMPREHENSIVE INCOME Comprehensive income consists of net income and other comprehensive income/(loss). Other comprehensive income/(loss) includes unrealized gains and losses on securities available for sale and unrealized gains and losses on cash flow hedges which are recognized as separate components of equity. COMMITMENTS AND CONTINGENT LIABILITIES Loss contingencies, including claims and legal actions arising in the ordinary course of business are recorded as liabilities when the likelihood of loss is probable and an amount or range of loss can be reasonably estimated. Management does not believe there now are such matters that will have a material effect on the financial statements. In the ordinary course of business, the Company 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. REVENUE RECOGNITION Accounting Standards Codification (“ASC”) Topic 606, Revenue from Contracts with Customers (“ASC 606”), provides guidance for reporting revenue from the entity's contracts to provide goods or services to customers. The guidance requires recognition of revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration that it expects to be entitled to receive in exchange for those goods or services recognized as performance obligations are satisfied. The majority of revenue-generating transactions are excluded from the scope of ASC 606, including revenue generated from financial instruments, such as securities and loans. Revenue-generating transactions that are within the scope of ASC 606, classified within non-interest income, are described as follows: • Deposit account service charges - represent service fees for monthly activity and maintenance on customer accounts. Attributes can be transaction-based, item-based or time-based. Revenue is recognized when our performance obligation is completed which is generally monthly for maintenance services or when a transaction is processed. Payment for such performance obligations are generally received at the time the performance obligations are satisfied. Other non-interest income primarily includes income on bank owned life insurance contracts, letter of credit fees and gains on sale of loans held for sale, none of which are within the scope of ASC 606. RECENT ACCOUNTING PRONOUNCEMENTS ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended In June 2016, the Financial Accounting Standards Board (“FASB”) issued guidance to change the accounting for credit losses and modify the impairment model for certain debt securities. The guidance requires a financial asset (including trade receivables) measured at amortized cost basis to be presented at the net amount expected to be collected. Thus, the statement of operations will reflect the measurement of credit losses for newly-recognized financial assets as well as the NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 expected increases or decreases of expected credit losses that have taken place during the period. The amendments will be effective for the Company for fiscal years beginning after December 15, 2022 including interim periods within those fiscal years. Early adoption is permitted for all organizations beginning after December 15, 2018. The Company is currently in the process of evaluating the impact of adoption of this guidance on the consolidated financial statements. ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting On March 12, 2020, the FASB issued Updated 2020-04 to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging instruments, and other transactions that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. The new guidance provides the following options expedients that reduce costs and complexity of accounting for reference rate reform: • Simplify accounting analysis for contract modifications. • Allow hedging relationships to continue without de-designation if there are qualifying changes in the critical terms of an existing hedging relationship due to reference rate reform. • Allow a change in the systematic and rational method used to recognize in earnings the components excluded from the assessment of hedge effectiveness. • Allow a change in the designated benchmark interest rate to a different eligible benchmark interest rate in a fair value hedging relationship. • Allow the shortcut method for a fair value hedging relationship to continue for the remainder of the hedging relationship. • Simplify the assessment of hedge effectiveness and provide temporary optional expedients for cash flow hedging relationships affected by reference rate reform. • Allow a one-time election to sell or transfer debt securities classified as held to maturity that reference a rate affected by reference rate reform and are classified as held to maturity before January 1, 2020. The amendments are effective for all entities from the beginning of an interim period that includes the issuance date of the ASU. An entity may elect to apply the amendments prospectively through December 31, 2022. The adoption of this standard is not expected to have material effect on the Company’s operating results or financial condition. 2. Restriction of Cash and Due from Banks The Company is required to maintain reserve funds in cash or on deposit with the Federal Reserve. The required reserve at December 31, 2021 and 2020 was $0. Additionally, the Company is required to pledge cash as collateral for its derivative positions with its counterparty. The required reserve at December 31, 2021 and 2020 was $0 and $400,000, respectively. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. Investment Securities The amortized cost and fair values of securities as shown in the balance sheets of the Company are as follows: DEC. 31, 2021 Available-for-sale Corporate notes Mortgage-backed securities Municipal securities - tax exempt Municipal securities - taxable SBA loan pools Asset-backed securities Private-label mortgage-backed securities Private-label collateralized loan obligations AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ 34,398,302 $ 601,929 $ (752,980) $ 34,247,251 61,976,349 11,355,094 25,200,345 6,748,930 6,648,047 18,965,820 6,009,823 513,544 344,748 296,819 23,342 270,828 2,925 (569,089) 61,920,804 (16,702) 11,683,140 (261,364) 25,235,800 (85,073) (11,772) 6,687,199 6,907,103 (125,488) 18,843,257 - (1,983) 6,007,840 Total Available-for-sale $ 171,302,710 $2,054,135 $ (1,824,451) $ 171,532,394 Held-to-maturity Corporate notes Municipal securities - tax exempt Municipal securities - taxable AMORTIZED COST GROSS UNRECOGNIZED GAINS GROSS UNRECOGNIZED LOSSES FAIR VALUE $ 4,000,000 $ - $ - $ 4,000,000 11,994,887 137,777 (30,914) 12,101,750 2,017,987 - (123,963) 1,894,024 Total Held-to-maturity $ 18,012,874 $ 137,777 $ (154,877) $ 17,995,774 DEC. 31, 2020 Available-for-sale Corporate notes Mortgage-backed securities Municipal securities - tax exempt Municipal securities - taxable SBA loan pools Asset backed securities Total Available-for-sale Held-to-maturity Municipal securities - tax exempt Municipal securities - taxable AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ 19,763,774 $ 174,642 $ (60,059) $ 19,878,357 43,853,112 9,714,912 13,255,621 3,582,406 5,230,952 817,934 321,625 298,644 26,128 342,627 (57,672) 44,613,374 - 10,036,537 (5,834) 13,548,431 (70,687) - 3,537,847 5,573,579 $ 95,400,777 $1,981,600 $ (194,252) $ 97,188,125 AMORTIZED COST GROSS UNRECOGNIZED GAINS GROSS UNRECOGNIZED LOSSES FAIR VALUE $ 13,951,910 $ - $ (8,784) $ 13,943,126 2,180,457 - (185,928) 1,994,529 Total Held-to-maturity $ 16,132,367 $ - $ (194,712) $ 15,937,655 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 The amortized cost and estimated fair value of debt securities at December 31, 2021, by contractual maturity, are as follows: Amounts maturing in 1 year or less After 1 year - 5 years After 5 years - 10 years After 10 years AVAILABLE-FOR-SALE HELD-TO-MATURITY AMORTIZED COST FAIR VALUE AMORTIZED COST FAIR VALUE $ - $ - $ - $ - 6,533,621 6,619,784 34,209,560 34,038,493 1,247,607 4,000,000 1,216,693 4,000,000 49,617,360 50,110,056 12,765,267 12,779,081 90,360,541 90,768,333 18,012,874 17,995,774 Mortgage-backed securities 80,942,169 80,764,061 - - $ 171,302,710 $171,532,394 $ 18,012,874 $ 17,995,774 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. Securities not due at a single maturity date are shown separately. At December 31, 2021 and 2020, the Company had no pledged securities. Information pertaining to securities with gross unrealized losses at December 31, 2021, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows: DEC. 31, 2021 Available-for-sale Corporate notes Mortgage-backed securities Municipal securities - tax exempt Municipal securities - taxable SBA loan pools Asset-backed securities LESS THAN 12 MONTHS OVER 12 MONTHS GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE $ 735,480 $ 17,724,598 $ 17,500 $ 482,500 467,468 31,363,925 101,621 3,228,472 16,702 2,339,460 252,622 10,797,126 30,426 11,772 2,892,392 2,000,507 - 8,742 54,647 - - - - 246,258 1,677,044 - - - Private-label mortgage-backed securities 125,488 15,896,175 Private-label collateralized loan obligations 1,983 4,007,840 TOTALS $ 1,641,941 $ 87,022,023 $ 182,510 $ 5,634,274 GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE Held-to-maturity Municipal securities - tax exempt $ 30,914 $ 1,216,693 $ - $ - Municipal securities - taxable - - 123,963 1,894,024 $ 30,914 $ 1,216,693 $ 123,963 $ 1,894,024 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LESS THAN 12 MONTHS OVER 12 MONTHS GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE $ 36,247 $ 8,435,868 $ 23,812 $ 976,188 17,588 5,834 - 2,507,998 3,204,330 40,084 2,471,976 - - - 70,687 2,103,941 $ 59,669 $ 14,148,196 $ 134,583 $ 5,552,105 GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE DEC. 31, 2020 Available-for-sale Corporate notes Mortgage-backed securities Municipal securities - taxable SBA loan pools TOTALS Held-to-maturity Municipal securities - tax exempt $ 8,784 $ 9,361,510 $ - $ - Municipal securities - taxable 185,928 1,994,529 - - $ 194,712 $ 11,356,039 $ - $ - 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 Company 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, 2021, seventy-eight debt securities with an unrealized loss for less than one year and twenty debt securities with an unrealized loss for greater than one year depreciated approximately 1.99 percent from the Company’s amortized cost basis. Thirty-six of the securities are secured by Federal agency mortgage backed securities (MBS) or U.S. Treasury obligations and direct obligations of U.S. Government agencies, three are tax-exempt municipal securities, fourteen are taxable municipal securities, twelve are Small Business Administration (SBA) securities, seventeen are corporate bonds, eleven are private-label MBS, one is an Asset Based Security (ABS), and four are private-label Collateralized Loan Obligations (CLO). 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. The proceeds from sales and calls of securities and the associated gains and losses are listed below as of December 31. Proceeds Gross gains Gross losses 2021 2020 $ 1,437,181 $ 4,798,905 19,199 13,493 46,703 - The tax provision related to these net realized gains and losses was $1,337 and $9,808 for the years ended December 31, 2021 and 2020, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 Restricted stock investments consist of the following at December 31: Federal Reserve Bank stock Federal Home Loan Bank stock Community Bankers Bank stock TOTALS 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 Loans, gross Deferred loan fees, net Loans receivable Allowance for loan losses Loans, net 2021 2020 $ 1,782,750 $ 1,764,700 1,472,500 1,777,100 66,000 66,000 $ 3,321,250 $ 3,607,800 2021 2020 $ 131,697,086 $ 188,140,971 350,262,626 280,043,149 33,462,692 16,835,445 54,346,882 53,335,262 33,682,890 14,953,647 603,452,176 553,308,474 (1,082,855) (2,881,623) 602,369,321 550,426,851 (6,486,120) (5,454,925) $ 595,883,201 $ 544,971,926 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 Company’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 Company 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 deed of trust 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. 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2021 Allowance for Loan Losses COMMERCIAL & INDUSTRIAL REAL ESTATE - COMMERCIAL REAL ESTATE - CONSTRUCTION REAL ESTATE - RESIDENTIAL CONSUMER TOTAL Beginning balance $ 850,858 $ 3,903,438 $ 219,587 $ 388,518 $ 92,524 $ 5,454,925 Charge-offs Recoveries Provision - 166,007 - - - - (164,355) 540,203 239,232 - 1,500 910 - 24,688 223,010 - 192,195 839,000 Ending Balance $ 852,510 $ 4,443,641 $ 458,819 $ 390,928 $ 340,222 $ 6,486,120 Individually evaluated for impairment - - - - - - Collectively evaluated for impairment 852,510 4,443,641 458,819 390,928 340,222 6,486,120 Loans Receivable Ending Balance $131,697,086 $350,262,626 $ 33,462,692 $ 54,346,882 $ 33,682,890 $603,452,176 Individually evaluated for impairment $ 1,620,908 $ 13,500,870 $ - $ 816,021 $ - $ 15,937,799 Collectively evaluated for impairment 130,076,178 336,761,756 33,462,692 53,530,861 33,682,890 587,514,377 YEAR 2020 Allowance for Loan Losses COMMERCIAL & INDUSTRIAL REAL ESTATE - COMMERCIAL REAL ESTATE - CONSTRUCTION REAL ESTATE - RESIDENTIAL CONSUMER TOTAL Beginning balance $ 805,618 $ 2,549,955 $ 163,258 $ 473,571 $ 129,291 $ 4,121,693 Charge-offs Recoveries Provision (167,768) 8,000 - - - - - 1,000 - - (167,768) 9,000 205,008 1,353,483 56,329 (86,053) (36,767) 1,492,000 Ending Balance $ 850,858 $ 3,903,438 $ 219,587 $ 388,518 $ 92,524 $ 5,454,925 Individually evaluated for impairment - - - 2,353 - 2,353 Collectively evaluated for impairment 850,858 3,903,438 219,587 386,165 92,524 5,452,572 Loans Receivable Ending Balance $188,140,971 $280,043,149 $ 16,835,445 $ 53,335,262 $ 14,953,647 $553,308,474 Individually evaluated for impairment $ 668,361 $ 3,858,376 $ - $ 3,068,192 $ - $ 7,594,929 Collectively evaluated for impairment 187,472,610 276,184,773 16,835,445 50,267,070 14,953,647 545,713,545 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 An analysis of non-accrual and past due loans is as follows at December 31: YEAR 2021 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 $ - $ - $1,066,739 $1,066,739 $130,630,347 $131,697,086 $ 1,048,101 Real estate - commercial 856,188 916,832 1,301,732 3,074,752 347,187,874 350,262,626 7,487,957 Real estate - construction Real estate - residential Consumer TOTALS YEAR 2020 - - - - - - - - - - - - 33,462,692 33,462,692 54,346,882 54,346,882 33,682,890 33,682,890 - - - $ 856,188 $ 916,832 $2,368,471 $4,141,491 $599,310,685 $603,452,176 $ 8,536,058 Commercial and industrial $ - $ - $ - $ - $188,140,971 $188,140,971 $ - Real estate - commercial Real estate - construction Real estate - residential Consumer TOTALS - - - - - - - - 1,557,073 1,557,073 278,486,076 280,043,149 1,563,108 - - 16,835,445 16,835,445 - 1,615,228 1,615,228 51,720,034 53,335,262 1,615,228 - - 14,953,647 14,953,647 - $ - $ - $ 3,172,301 $ 3,172,301 $550,136,173 $553,308,474 $ 3,178,336 The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. An analysis of impaired loans based on loan segment is as follows at December 31: RECORDED INVESTMENT UNPAID PRINCIPAL BALANCE RELATED ALLOWANCE FOR LOAN LOSSES AVERAGE RECORDED INVESTMENT INTEREST INCOME RECOGNIZED $ 1,620,908 $ 1,620,908 $ - $ 1,907,722 $ 89,903 YEAR 2021 With no related allowance recorded: 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 13,500,870 13,586,522 - - 816,021 816,021 - - - - - - - - - - - - Commercial and Industrial 1,620,908 1,620,908 Real Estate - Commercial Real Estate - Construction Real Estate - Residential Consumer 13,500,870 13,586,522 - - 816,021 816,021 - - - - - - - - - - - - - - - - 13,252,413 757,027 - - 876,117 52,617 - - - - - - - - - - - - 1,907,722 13,252,413 - 89,903 757,027 - 876,117 52,617 - - $ 15,937,799 $ 16,023,451 $ - $ 16,036,252 $ 899,547 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS YEAR 2020 With no related allowance recorded: 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 Commercial and Industrial Real Estate - Commercial Real Estate - Construction Real Estate - Residential Consumer RECORDED INVESTMENT UNPAID PRINCIPAL BALANCE RELATED ALLOWANCE FOR LOAN LOSSES AVERAGE RECORDED INVESTMENT INTEREST INCOME RECOGNIZED $ 668,361 $ 668,361 $ - $ 782,678 $ 45,808 3,858,376 3,859,931 - - 1,452,964 1,452,964 - - - - - - - - - - - - - - - 3,899,716 125,644 - - 1,478,917 89,567 - - - - - - - - 1,615,228 1,738,228 2,353 1,642,728 55,000 - - 668,361 668,361 3,858,376 3,859,931 - - - - - - - - 782,678 3,899,716 - 45,808 125,644 - 3,068,192 3,191,192 2,353 3,121,645 144,567 - - - - - $ 7,594,929 $ 7,719,484 $ 2,353 $ 7,804,039 $ 316,019 No additional funds are committed to be advanced in connection with the impaired loans. CREDIT QUALITY INDICATORS One of the most significant factors in assessing the Company’s loan portfolio is the risk rating. The Company 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 Company’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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 An analysis of the credit quality indicators is as follows at December 31: YEAR 2021 PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL Commercial and industrial $129,310,054 $ 752,301 $ 1,634,731 $ - $ - $131,697,086 Real estate - commercial 325,867,070 10,877,078 13,518,478 Real estate - construction 33,462,692 - - 53,077,167 33,682,890 453,694 816,021 - - - - - - - - - - 350,262,626 33,462,692 54,346,882 33,682,890 $575,399,873 $ 12,083,073 $ 15,969,230 $ - $ - $603,452,176 PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL Real estate - residential Consumer TOTALS YEAR 2020 Commercial and industrial $186,482,853 $ 989,757 $ 668,361 $ - $ - $188,140,971 Real estate - commercial 269,613,896 6,570,877 3,858,376 Real estate - construction 16,835,445 - - Real estate - residential Consumer TOTALS 49,011,982 14,953,647 798,411 3,524,869 - - - - - - - - - - 280,043,149 16,835,445 53,335,262 14,953,647 $536,897,823 $ 8,359,045 $ 8,051,606 $ - $ - $553,308,474 TROUBLED DEBT RESTRUCTURINGS 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 Company 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, 2021 and December 31, 2020, the Company had $0 in recorded investment in troubled debt restructurings. Additionally, no loans were classified as TDRs during the reporting periods. As such, there was no specific reserve allocated to these types of loan classifications at December 31, 2021 and December 31, 2020. PAYMENT PROTECTION PLAN LOANS On March 27, 2020, the President signed H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) into law. Among other provisions, the CARES Act authorized the Payment Protection Program (“PPP”). The PPP provides small businesses with 500 or fewer employees with funds to pay up to eight weeks of payroll costs including benefits, interest on mortgages, rent and utilities. Funds were made available in the form of fully guaranteed 7(a) loans administered by the Small Business Administration (“SBA”), and made by approved SBA lenders. The loan amounts disbursed may be forgiven in whole or in part by the SBA. The interest rate on the PPP loans is 1% and the term varies from two to five years (loan term of five years for PPP loans originated pursuant to the Paycheck Protection Program Flexibility Act, signed into law on June 5, 2020). Additionally, the SBA pays processing fees to the lenders, which vary depending upon the loan amount. As an approved SBA lender, the Company participated in the PPP loan program, processed and funded 512 loans with original balances of $109.60 million in the second and third quarter. As of December 31, 2021, and 2020 there were 178 and 474 PPP loans with an outstanding balance of $32.36 million and $101.21 million, respectively. These loans have $873,828 and $1,941,032 in remaining net unearned fees for the years then ended. These loans are included with commercial and industrial loans and have no allowance for loan loss reserve recorded as they all carry a full faith and guarantee by the SBA. CARES ACT LOAN DEFERRALS During the year ended December 31, 2020, pursuant to the CARES Act and interagency guidance on loan modifications related to COVID-19, the Company granted loan payment deferrals of up to six months to ninety-six borrowers representing $89.35 million of outstanding loan balances at the time of deferral. The Company elected to account for all modifications under Section 4013 of the CARES Act thereby receiving temporary relief from troubled debt restructuring classification. As of December 31, 2020, thirteen loans with a total outstanding loan balance of $13.92 million were in deferral. All loans completed their contractual deferral periods in the first quarter of 2021. There were no loans under loan payment deferrals as of December 31, 2021. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS OTHER MATTERS During the year ended December 31, 2021, the Company purchased 510 unsecured consumer-purpose loans with an aggregate unpaid principal balance of $25.45 million at the time of purchase. The pool was purchased at a discount which will be accreted to income over the weighted average life of the pool which was calculated as 5.5 years. These loans are categorized as Consumer and Other in the tables presented. The Company has entered into transactions with certain directors, executive officers, and their affiliates. The aggregate amount of loans outstanding to such related parties, as defined by Item 404 of SEC Regulation S-K, was $6,228,202 and $12,469,246 at December 31, 2021 and 2020, respectively. New loans made to such related parties amounted to $0, and repayments amounted to $169,169 in 2021. One loan with a balance of $6,071,875 at December 31, 2020 was paid in full during the year ended December 31, 2021. 5. Premises and Equipment Premises and equipment include the following as of December 31: Furniture and equipment Leasehold improvements Software Total Cost Less accumulated depreciation 2021 2020 $ 1,520,382 $ 1,554,549 1,465,923 1,463,207 181,211 180,115 3,167,516 3,197,871 (2,028,312) (1,899,462) NET BANK PREMISES AND EQUIPMENT $ 1,139,204 $ 1,298,409 Depreciation and amortization of Company premises and equipment charged to expense amounted to $186,309 and $254,675 in 2021 and 2020, respectively. 6. Other Assets Other Assets include the following as of December 31: Investment in limited partnership - Small Business Investment Company 2021 $ 1,495,674 2020 $ 1,495,674 Investment in limited partnership - Low Income Housing Investment Fund 3,247,613 3,492,013 Accounts receivable Interest rate lock commitment Prepaid expenses Fair value of derivative instruments Other assets TOTAL 752,113 183,807 739,704 1,305,527 146,179 540,124 870,844 691,715 - 55,317 $ 7,870,617 $ 7,145,687 During the year ended December 31, 2020, the Company committed $1.5 million to a Small Business Investment Company (“SBIC”) with a sector focus in Communications Infrastructure and Technology (“CIT”). The investment is scheduled to phase in via General Partner (“GP”) capital calls beginning in the fourth quarter of 2020 and phasing in entirely over an estimated eighteen month period. The Company’s financial investment in this SBIC limited partnership will not constitute a greater than 3% interest in the general partnership; therefore, the investment is recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. The Company has recognized a liability, in other liabilities, representing the unfunded portion of the partnership commitment. During the years ended December 31, 2021 and 2020, the Company had received and paid capital calls for $407,447 and $329,272, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 During the year ended December 31, 2020, the Company committed $3.5 million to a Low Income Housing Tax Credit (“LIHTC”) investment. The partnership was formed to pursue and make investments in multifamily rental apartment complexes rented, in whole or in part, to qualified low- and moderate-income tenants. The Company’s financial investment in this limited partnership will not constitute a greater than 3% interest in the general partnership; therefore, the investment is recorded at cost, less any impairment, plus or minus changes resulting from observable price changes in orderly transactions for the identical or similar investments of the same issuer. The Company has recognized a liability, in other liabilities, representing the unfunded portion of the partnership commitment. During the years ended December 31, 2021 and 2020, the Company had received and paid capital calls for $921,238 and $309,030, respectively. 7. Deposits The following are time deposits maturing in years ending December 31: 2022 2023 2024 2025 2026 THEREAFTER TOTAL $ 129,556,093 29,960,095 9,689,055 2,506,380 1,564,606 46,298 $ 173,322,527 Time deposits in denominations that meet or exceed the FDIC minimum limit of $250,000 or more totaled $67,738,195 and $83,000,897 at December 31, 2021 and 2020, respectively. The Company held related party deposits of $5,521,014 and $11,946,073 at December 31, 2021 and 2020, respectively. 8. Borrowings and Advances The Company’s borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $29.04 million and $30.07 million at December 31, 2021 and 2020, respectively. At December 31, 2021 and 2020, the weighted average rates on FHLB advances were 0.67% and 1.59%, respectively. These advances were secured by a blanket collateral agreement with the FHLB pledging the Company’s portfolio of residential first mortgage loans with a collateral value of $93.5 million and $104.2 million, respectively. FHLB advances are subject to prepayment penalties. During the year ended December 31, 2021 and 2020, the Company prepaid no FHLB advances. Callable advances are callable at the option of the FHLB. If an advance is called, the Company 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 (or a replacement index as not yet determined). The Company had no callable FHLB advances at December 31, 2021 and 2020. Advances from the FHLB are summarized by year of maturity and weighted average interest rate at December 31, 2021: 2022 2023 2024 2025 2026 THEREAFTER TOTAL 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS AMOUNT WEIGHTED AVERAGE RATE $ 9,035,714 1.08% - - - - N/A N/A N/A N/A 20,000,000 0.48% $ 29,035,714 The Company has utilized the Federal Reserve Board’s (“FRB”) Payment Protection Plan Liquidity Facility (“PPPLF”) to provide match funding for Payment Protection Plan (“PPP”) loan origination. PPPLF advances do not have specified maturity dates; rather, they are required to be paid off at the time of the underlying PPP loan payoff. The Company’s borrowings under the PPPLF were $32.06 million and $101.95 million at December 31, 2021 and 2020, respectively. The weighted average rate on PPPLF advances was 0.35% at December 31, 2021 and 2020. 9. Subordinated Notes On November 8, 2021, the Company completed the issuance of $20.0 million in aggregate principal amount of fixed-to- floating rate subordinated notes in a private placement transaction to various accredited investors. The net proceeds of the offering are intended to support growth and be used for other general business purposes. The notes have a maturity date of December 1, 2031 and have an annual fixed interest rate of 3.50% until December 1, 2026. Thereafter, the notes will have a floating interest rate indexed to the Secured Overnight Financing Rate (“SOFR”) (computed on the basis of a 360-day year of twelve 30-day months) from and including December 1, 2026 to the maturity date or any early redemption date. Interest will be paid semi-annually, in arrears, on June 1 and December 1 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest is to be paid quarterly, on March 1, June 1, September 1, and December 1 of each year, during the time in which the interest rate is floating. The balance of subordinated notes, net of issuance costs, is categorized as Subordinated Debt on the balance sheet and was $19,616,869 for the year ended December 31, 2021. 10. Other Liabilities Other liabilities include the following as of December 31: Unfunded commitment in limited partnership - Small Business Investment Company Unfunded commitment in limited partnership - Low Income Housing Investment Fund Accrued expenses Automated Clearing House (ACH) transactions pending Accounts payable Fair value of derivative instruments Other liabilities TOTAL 2021 2020 $ 763,281 $ 1,170,728 2,269,732 3,190,970 2,620,438 2,727,102 199,859 188,108 710,815 241,622 1,555,775 425,438 68,561 108,933 $ 6,993,855 $ 9,247,507 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 11. Income Taxes Deferred Tax Assets Year-end deferred tax assets and liabilities were due to the following: Allowance for loan losses Unearned loan fees and costs, net Accrued compensation Non-accrual loan interest Restricted stock Lease liability Unrealized losses on cash flow hedges Other Deferred Tax Liabilities Depreciation Unrealized gains on securities Unrealized gains on cash flow hedges Right-of-use asset Interest rate lock 2021 2020 $ 1,409,601 $ 1,184,064 38,145 437,358 19,337 75,818 187,081 394,984 32,933 79,541 593,016 702,886 - 19,777 15,083 32,129 2,593,052 2,628,701 181,713 48,233 124,890 567,155 39,946 961,937 208,650 393,217 - 683,728 189,028 1,474,623 NET DEFERRED TAX ASSET $ 1,631,115 $ 1,154,078 Income tax expense was the following as of December 31: Current tax expense Federal State Deferred tax expense (benefit) Federal State 2021 2020 $ 2,678,042 $ 2,320,377 121,530 80,445 (259,820) (612,352) (12,206) (69,944) $ 2,527,546 $ 1,718,526 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Effective tax rates differ from the federal statutory rate of 21% applied to income before income tax expense due to the following: Federal statutory rate times financial statement income Effect of: State income taxes, net of federal benefit Tax-exempt interest income, net of disallowance Earnings from bank-owned life insurance Net operating loss carryback benefit Unrecognized tax benefits, net Stock compensation Low-income housing investment benefit Other 2021 $ 2,783,657 2020 $ 1,907,431 86,639 (102,674) (114,380) - (31,380) (65,354) (60,911) 31,949 8,296 (71,192) (134,235) (87,701) 62,397 10,798 (1,956) 24,688 $ 2,527,546 $ 1,718,526 The Coronavirus Aid, Relief, and Economic Security Act ("CARES Act") was enacted on March 27, 2020. Under the CARES Act, net operating losses arising in tax years beginning after December 31, 2017, and before January 1, 2021 can be carried back five tax years preceding the tax year which the loss originated. In the 2018 tax year, the Company generated a net operating loss which it carried back following the passage of the CARES Act. As a result, the Company recorded a tax benefit of $87,701 for the year ended December 31, 2020 due to federal statutory rates being higher in the carry back year than the 2018 tax year. A reconciliation of the beginning and ending amount of unrecognized tax benefits were the following as of December 31: Balance, beginning of year Increases related to prior tax positions Decreases related ot prior tax positions Increases related to current tax positions Settlements Lapse of statute Balance, end of year 2021 $ 69,605 - - - - (33,569) 2020 $ - 69,605 - - - - $ 36,036 $ 69,605 The Company's policy is to recognize interest and penalties related to unrecognized tax benefits in income tax expense. The accrual for interest and penalties was not material for all years presented. The Company is subject to income tax by federal and state taxing authorities in which the Company does business in. The Company is subject to examination by the Internal Revenue Services for the tax periods ending after December 31, 2017. The Company is subject to examination by state taxing authorities for the tax year beginning January 1, 2021, it's initial year of filing in income tax jurisdictions. 12. 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 Company’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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 The Bank is required to maintain (i) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% "capital conservation buffer" (which is added to the 4.5% CET1 ratio, effectively resulting in a minimum ratio of CET1 to risk- weighted assets of at least 7.0%); (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio, effectively resulting in a minimum Tier 1 capital ratio of 8.5%); (iii) a minimum ratio of total capital (that is, Tier 1 plus Tier 2 capital) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio, effectively resulting in a minimum total capital ratio of 10.5%); and (iv) a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to adjusted average quarterly assets. As of December 31, 2021, 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 and Holding Company’s actual capital amounts and ratios as of December 31, 2021 and 2020 are as follows: ACTUAL FOR CAPITAL ADEQUACY PURPOSES MINIMUM TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DEC. 31, 2021 Total capital (to risk-weighted assets) Freedom Finanical Holdings, Inc. $108,793,573 15.66% $ 72,945,150 10.50% N/A N/A The Freedom Bank of Virginia $107,139,930 15.42% $ 72,945,150 10.50% $ 69,471,571 10.00% Tier 1 capital (to risk-weighted assets) Freedom Finanical Holdings, Inc. $ 84,158,725 12.11% $ 59,050,835 8.50% N/A N/A The Freedom Bank of Virginia $100,653,810 14.49% $ 59,050,835 8.50% $ 55,577,257 8.00% Common Equity Tier 1 (to risk-weighted assets) Freedom Finanical Holdings, Inc. $ 83,507,453 12.02% $ 48,630,100 7.00% N/A N/A The Freedom Bank of Virginia $100,653,810 14.49% $ 48,630,100 7.00% $ 45,156,521 6.50% Tier 1 capital (to adjusted average assets) Freedom Finanical Holdings, Inc. $ 83,507,453 9.84% $ 33,964,861 4.00% N/A N/A The Freedom Bank of Virginia $100,653,810 11.85% $ 33,964,861 4.00% $ 42,456,077 5.00% 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACTUAL FOR CAPITAL ADEQUACY PURPOSES MINIMUM TO BE WELL CAPITALIZED UNDER PROMPT CORRECTIVE ACTION PROVISIONS AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO DEC. 31, 2020 Total capital (to risk-weighted assets) The Freedom Bank of Virginia $ 77,572,547 14.21% $ 57,310,313 10.50% $ 54,581,251 10.00% Tier 1 capital (to risk-weighted assets) The Freedom Bank of Virginia $ 72,117,624 13.21% $ 46,394,063 8.50% $ 43,665,000 8.00% Common Equity Tier 1 (to risk-weighted assets) The Freedom Bank of Virginia $ 72,117,624 13.21% $ 38,206,875 7.00% $ 35,477,813 6.50% Tier 1 capital (to adjusted average assets) The Freedom Bank of Virginia $ 72,117,624 11.20% $ 25,758,677 4.00% $ 32,198,346 5.00% The Company’s principal source of funds for dividend payments is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of December 31, 2021, $20,797,655 of retained earnings is available to pay dividends. 13. Derivatives The Company uses interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position. The notional amount of the interest rate swaps does not represent amounts exchanged by parties. The amount is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. Cash Flow Hedges: Interest rate swaps with notional amounts totaling $24 million as of December 31, 2021 and 2020, were designated as cash flow hedges on certain brokered deposits and were determined to be effective during all periods presented. The Company expects the hedges to remain effective during the remaining terms of the swaps. Derivatives Not Designated As Hedges: The Company also enters into interest rates swaps with its loan customers. The notional amount of interest rate swaps with its loan customers as of December 31, 2021 and 2020 were $25,932,608 and $26,625,624, respectively. The Company enters into corresponding offsetting derivatives with third parties. While these derivatives represent economic hedges, they do not qualify as hedges for accounting purposes. The fair value of these derivatives were deemed immaterial at December 31, 2021. LINE ITEM IN THE BALANCE SHEET IN WHICH THE HEDGED ITEM IS INCLUDED CARRYING AMOUNT OF THE HEDGED LIABILITIES CUMULATIVE AMOUNT OF FAIR VALUE HEDGING ADJUSTMENT INCLUDED IN THE CARRYING AMOUNT OF THE HEDGED LIABILITY Brokered Deposits $ 14,000,000 $ 14,000,000 $ - $ - Brokered Time Deposits $ 10,000,000 $ 10,000,000 $ - $ - 2021 2020 2021 2020 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 The Company presents the net derivative position on the balance sheet in other assets/liabilities. The following table reflects the derivatives recorded on the balance sheet as of December 31: 2021 2020 NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE Included in other liabilities: Derivatives designated as hedges: Interest rate swaps related to brokered deposits $14,000,000 $ 379,789 $14,000,000 $ 19,082 Interest rate swaps related to brokered time deposits 10,000,000 214,923 10,000,000 (87,643) TOTAL INCLUDED IN OTHER LIABILITIES $24,000,000 $ 594,712 $24,000,000 $ (68,561) The effect of cash flow hedge accounting on accumulated other comprehensive income, net of taxes, for the years ended December 31 are as follows, net of taxes: 2021 AMOUNT OF GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVE LOCATION OF GAIN (LOSS) RECLASSIFIED FROM OCI INTO INCOME AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM OCI INTO INCOME Interest rate contracts $ 469,822 N/A 2020 $ - AMOUNT OF GAIN (LOSS) RECOGNIZED IN OCI ON DERIVATIVE LOCATION OF GAIN (LOSS) RECLASSIFIED FROM OCI INTO INCOME AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM OCI INTO INCOME Interest rate contracts $ (53,478) N/A $ - For the years ended December 31, 2021 and 2020 there was no gain or loss recognized in income on cash flow hedging relationships. 14. Stock Option & Equity Plan In 2007, the Company 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 Company 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 authorized and granted options under the Plan are as follows at December 31, 2021: 2007 Plan 1,075,280 854,512 655,579 AUTHORIZED GRANTED VESTED/ CANCELLED/ FORFEITED 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, 2021, there is no remaining amortization expense to be recognized on outstanding stock options. At December 31, 2020, there was approximately $615 in unrecognized compensation expense related to non-vested share-based compensation. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The intrinsic value of options exercised during 2021 and 2020 was $246,154 and $167,152 respectively. The weighted average remaining contractual life of options outstanding was 1.78 and 2.60 years for the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021 all outstanding options are fully vested. The intrinsic value of these fully vested options at December 31, 2021 was $492,474. The following summarizes the option activity under the Plan: BALANCE AT JANUARY 1, 2020 167,034 $ 6.47 NUMBER OF SHARES WEIGHTED AVERAGE EXERCISE PRICE Grants Exercised Expired Forfeited BALANCE AT DECEMBER 31, 2020 Grants Exercised Expired Forfeited - (49,896) (1,575) (525) 115,038 - (33,264) (3,589) - - 5.75 9.18 10.05 6.73 - 5.97 6.27 - BALANCE AT DECEMBER 31, 2021 78,185 $ 7.07 There were no stock options granted during the years ended December 31, 2021 and 2020. 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 Company 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 Company. 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. During the year ended December 31, 2021, 36,850 voting common shares of restricted stock were granted to Company employees. 26,850 shares were granted as part of a time-based restricted stock agreement with a weighted fair value of $10.42 at the date of grant. These restricted shares cliff vest over a three year period based on their date of grant. 10,000 shares were granted as part of a performance-based restricted stock agreement with a fair value of $12.60 at the date of grant. These restricted stock shares cliff vest over a five year (i.e., five annual performance tranches) period beginning March 15, 2022. At December 31, 2021, there was $548,584 in unrecognized compensation expense related to non-vested restricted stock awards that are expected to be recognized over a weighted average period of 1.69 years. At December 31, 2020, there was $649,567 in unrecognized compensation expense related to non-vested restricted stock awards. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 The following summarizes the restricted stock activity under the Plan: BALANCE AT JANUARY 1, 2020 Grants Vested Expired Forfeited BALANCE AT DECEMBER 31, 2020 Grants Vested Expired Forfeited BALANCE AT DECEMBER 31, 2021 NUMBER OF SHARES 120,500 18,000 (33,498) - (5,000) 100,002 36,850 (46,930) - (3,134) 86,788 WEIGHTED AVERAGE EXERCISE PRICE $ 10.81 10.05 10.90 - 10.00 10.68 11.01 10.65 - 10.18 $ 10.85 For the years ended December 31, 2021 and 2020, the Company recognized $463,283 and $410,554 in stock-based compensation expense, respectively. 15. Operating Leases The Company enters into leases in the normal course of business primarily for operations facilities, branch locations, and SBA/mortgage operations facilities. The Company’s leases have remaining terms ranging from thirteen months to forty-eight months, some of which include renewal options to extend the lease for up to ten years. The Company includes lease extensions if, after considering relevant economic factors, it is reasonably certain the Company will exercise the option. The Company has elected not to recognize leases with original lease terms of twelve months or less (short-term leases) on the Company’s balance sheet. Leases are classified as operating or finance leases at the lease commencement date. Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Right-of-use assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. The Company uses its incremental borrowing rate at lease commencement to calculate the present value of lease payments when the rate implicit in a lease is not known. The Company’s incremental borrowing rate is based on the FHLB amortizing advance rate, adjusted for the lease term and other factors. The Company opened a new SBA operations office in Harrison, New York on March 19, 2021. The lease contract for this location was executed on March 19, 2021 and lease commencement began May 18, 2021. The contractual lease term is for a duration of thirty-six months with one option for a thirty-six month renewal. For lease accounting purposes, it was assumed that the Company was more likely than not to renew the lease and a discount rate, based on FHLB advance funding rates on the date of lease execution, of 1.32% was utilized. Right-of-use assets and lease liabilities by lease type, and the associated balance sheet classifications are as follows: Right-of-use assets: Operating leases Right-of-use asset $ 2,704,888 $ 3,258,817 BALANCE SHEET CLASSIFICATION DEC. 31, 2021 DEC. 31, 2020 Lease liabilities: Operating leases Lease liability $ 2,823,885 $ 3,347,075 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease Expense The components of total lease cost were as follows for the period ending: Operating lease cost $ 996,600 $ 941,219 DECEMBER 31, 2021 DECEMBER 31, 2020 Lease Obligations Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2021 are as follows: 2022 2023 2024 2025 2026 THEREAFTER Total undiscounted lease payments Less: imputed interest Net lease liabilities OPERATING LEASE $ 1,019,358 831,225 329,996 295,504 118,421 261,471 2,855,975 32,090 $ 2,823,885 Supplemental Lease Information Operating lease weighted average remaining lease term (years) Operating lease weighted average discount rate DECEMBER 31, 2021 3.90 2.24% 16. 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 – Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 – Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 – Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39 The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: INVESTMENT SECURITIES: The fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2), using matrix pricing. Matrix pricing is a mathematical technique commonly used to price debt securities that are not actively traded, values debt securities without relying exclusively on quoted prices for the specific securities but rather by relying on the securities’ relationship to other benchmark quoted securities (Level 2 inputs). For securities where quoted prices or market prices of similar securities are not available, fair values are calculated using discounted cash flows or other market indicators (Level 3). INTEREST RATE LOCK COMMITMENT (IRLC): The Company recognizes IRLCs at fair value. Fair value of IRLCs is based on either (i) the price of the underlying loans obtained from an investor for loans that will be delivered on a best efforts basis or (ii) the observable price for individuals loans traded in the secondary market for loans that will be delivered on a mandatory basis. All of the Company’s IRLCs are classified as Level 3. DERIVATIVES: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2). Our derivatives are traded in an over-the-counter market where quoted market prices are not always available. Therefore, the fair value of derivatives are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of derivative, but could include interest rates, prices and indices to generate continuous yield or pricing curves, prepayment rates, and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing sources. LOAN SERVICING RIGHTS: On a quarterly basis, loan servicing rights are evaluated for impairment based upon the fair value of the rights as compared to carrying amount. If the carrying amount of the asset exceeds fair value, impairment is recorded on the servicing asset and it is carried at fair value. Fair value is determined based on a valuation model that calculates the present value of estimated future net servicing income. The valuation model utilizes interest rate, prepayment speed, and default rate assumptions that market participants would use in estimating future net servicing income and that can be validated against available market data (Level 2). The following table presents the balances of financial assets and liabilities measured at fair value on a recurring basis as of December 31: QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) FAIR VALUE 2021 Available-for-sale securities $171,532,394 $ - $171,532,394 $ - Interest rate lock commitment Cash flow derivatives Servicing rights asset 2020 183,807 594,712 56,343 - - - - 183,807 594,712 56,343 - - $172,367,256 $ - $172,183,449 $ 183,807 Available-for-sale securities $ 97,188,125 $ - $ 94,849,021 $ 2,339,104 Interest rate lock commitment Cash flow derivatives 870,844 (68,561) - - - 870,844 (68,561) - $ 97,990,408 $ - $ 94,780,460 $ 3,209,948 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents recurring level III assets: BALANCE AT JANUARY 1, 2020 Realized and unrealized gains included in earnings Purchase of securities Sales, maturities, calls, and paydowns of securities Transfer to (from) level III assets Unrealized gain/(loss) included in other comprehensive income Unrealized gain/(loss) not included in other comprehensive income BALANCE AT DECEMBER 31, 2020 Realized and unrealized gains included in earnings Purchase of securities Sales, maturities, calls, and paydowns of securities Transfer to (from) level III assets Unrealized gain/(loss) included in other comprehensive income Unrealized gain/(loss) not included in other comprehensive income AVAILABLE-FOR-SALE SECURITIES INTEREST RATE LOCK COMMITMENT $ - $ 65,694 - 805,150 1,089,563 (459) 1,250,000 - - - - - - - $ 2,339,104 $ 870,844 - - (839,104) (1,500,000) - - (687,037) - - - - - BALANCE AT DECEMBER 31, 2021 $ - $ 183,807 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 Company to measure certain financial assets recorded at fair value on a nonrecurring basis in the financial statements: IMPAIRED LOANS: The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by independent appraisers to adjust for differences between the comparable sales and income data available for similar loans and collateral underlying such loans. For this reason, the fair value classification of these loans is Level 3. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's expertise and knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification. Impaired loans are evaluated on a quarterly basis for additional impairment and adjusted in accordance with the allowance policy. The following table summarizes the Company’s financial assets that were measured at fair value on a nonrecurring basis as of December 31: 2021 Impaired loans 2020 Impaired loans QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) FAIR VALUE $ - $ - $ - $ - $ 1,612,875 $ - $ - $ 1,612,875 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 41 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: FAIR VALUE MEASUREMENTS FAIR VALUE VALUATION TECHNIQUE(S) UNOBSERVABLE INPUTS RANGE OF INPUTS 2021 Impaired loans $ - N/A N/A N/A 2020 Impaired loans $ 1,612,875 Sales Comparison Approach Adjustments for differences between the comparable sales 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 Company. Additionally, in accordance with ASU 2016-01, which the Bank adopted on January 1, 2018 on a prospective basis, the Company 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, 2021 USING CARRYING AMOUNT LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Financial assets Cash and due from banks $ 2,536,450 $ 2,536,450 $ - $ - $ 2,536,450 Interest bearing deposits with banks 31,696,891 31,696,891 - Securities available-for-sale Securities held-to-maturity Loans held for sale Loans receivable, net 171,532,394 18,012,874 13,297,125 595,883,201 - - - - Accrued interest receivable 2,466,712 2,466,712 Interest rate lock commitment Cash flow derivative 183,807 594,712 - - 171,532,394 - - 31,696,891 171,532,394 13,995,774 4,000,000 17,995,774 13,297,125 - 13,297,125 - - - 594,712 599,929,000 599,929,000 - 2,466,712 183,807 - 183,807 594,712 TOTAL FINANCIAL ASSETS $836,204,166 $ 36,700,053 $199,420,005 $604,112,807 $840,232,865 Financial liabilities Demand deposits Time deposits $528,370,874 $528,370,874 $ - $ - $528,370,874 Federal Home Loan Bank advances 29,035,714 PPP liquidity facility advances 32,055,915 Subordinated debt, net of issuance costs Accrued interest payable 173,322,527 19,616,869 - - - - 173,280,000 28,840,342 32,055,915 19,616,869 294,237 294,237 - - - - - - 173,280,000 28,840,342 32,055,915 19,616,869 294,237 TOTAL FINANCIAL LIABILITIES $782,696,136 $528,665,111 $253,793,126 $ - $782,458,237 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2020 USING CARRYING AMOUNT LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Financial assets Cash and due from banks $ 1,792,660 $ 1,792,660 $ - $ - $ 1,792,660 Interest bearing deposits with banks 25,543,295 25,543,295 - - 25,543,295 Securities available-for-sale Securities held-to-maturity Loans held for sale Loans receivable, net 97,188,125 16,132,367 45,047,711 544,971,926 - - - - Accrued interest receivable 2,868,868 2,868,868 Interest rate lock commitment 870,844 - 94,849,021 2,339,104 97,188,125 - 15,937,655 15,937,655 45,047,711 - 45,047,711 - - - 553,812,000 553,812,000 - 2,868,868 870,844 870,844 TOTAL FINANCIAL ASSETS $734,415,796 $ 30,204,823 $139,896,732 $572,959,603 $743,061,158 Financial liabilities Demand deposits Time deposits $372,374,542 $372,374,542 $ - $ - $372,374,542 Federal Home Loan Bank advances 35,857,143 PPP liquidity facility advances 101,951,020 176,114,292 - - - 200,761,000 28,447,166 101,951,020 Accrued interest payable Cash flow derivatives 433,586 68,561 433,586 - - 68,561 - - - - - 200,761,000 28,447,166 101,951,020 433,586 68,561 TOTAL FINANCIAL LIABILITIES $686,799,144 $372,808,128 $331,227,747 $ - $704,035,875 17. Financial Instruments with Off-Balance Sheet Risk In the normal course of business, the Company 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 Company’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 Company 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 2021 2020 $ 137,281,000 $ 154,077,000 $ 2,002,443 $ 1,394,000 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 Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company 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 Company 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 Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43 18. Deferred Benefits The Company has a traditional contributory 401(k) savings plan covering substantially all employees, which allows eligible employees to contribute up to 100 percent of their compensation, subject to the limits established by the IRS for 401(k) contributions. During the year ended December 31, 2020, the Company began offering a post-tax Roth deferral plan to substantially all employees. Both deferral options receive a non-discretionary match subject to limitations based on annual salary. Expenses related to this non-discretionary match were $311,657 and $239,162 for the years ended December 31, 2021 and 2020, respectively. The Company 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. 19. 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 GAINS (LOSSES) ON CASH FLOW DERIVATIVES ACCUMULATED OTHER COMPREHEN- SIVE (LOSS) BALANCE AT JANUARY 1, 2020 Unrealized gains net of tax of ($410,805) Reclassification for gains on sales net of tax of $9,808 $ (29,274) 1,460,301 (36,895) $ - - - Unrealized loss on cash flow derivative, net of tax of $15,083 - (53,478) $ (29,274) 1,460,301 (36,895) (53,478) BALANCE AT DECEMBER 31, 2020 $ 1,394,132 $ (53,478) $ 1,340,654 Unrealized losses net of tax of $364,654 Reclassification for gains on sales net of tax of $1,337 Unrealized gain on cash flow derivative, net of tax of ($155,275) (1,193,011) (4,369) - - - 507,998 (1,193,011) (4,369) 507,998 BALANCE AT DECEMBER 31, 2021 $ 196,752 $ 454,520 $ 651,272 The following is changes in significant amounts reclassified out of each component of accumulated other comprehensive income for the year ended December 31: Details about Accumulated Other Comprehensive Income Components Amount Reclassified From Accumulated Other Comprehensive Income Affected Line Item in the Statement Where Net Income is Presented 2021 Unrealized gains and losses on available-for-sale securities Realized gains on securities available-for-sale $ 5,706 Gain on Sale of Investment Securities Other-than-temporary Impairment - N/A Total before tax Tax effect Net of Tax 2020 5,706 (1,337) $ 4,369 Income Tax Expense Unrealized gains and losses on available-for-sale securities Realized gains on securities available-for-sale $ 46,703 Gain on Sale of Investment Securities Other-than-temporary Impairment - N/A Total before tax Tax effect Net of Tax 46,703 (9,808) $ 36,895 Income Tax Expense 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Related Party Transactions For the years ended December 31, 2021 and 2020, the Company used a brokerage firm, at which one of the Company’s directors is a principal. This brokerage firm offers benefits such as payroll services and health and dental insurance for employees of the Company. The brokerage firm receives commission payments directly from the benefit providers. Company- paid fees amounted to $0 and $400 for the years ended December 31, 2021 and 2020. 21. Parent Company Condensed Financial Information BALANCE SHEETS As of December 31 ASSETS Cash Investment in Bank Subsidiary Other Assets TOTAL ASSETS LIABILITIES Subordinated Debt (net of issuance costs) Other Liabillities Total Stockholders' Equity 2021 2020 $ 3,271,498 $ - 101,305,082 315,398 - - $104,891,978 $ - $ 19,616,869 $ - 1,116,385 84,158,724 - - TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $104,891,978 $ - STATEMENT OF OPERATIONS Years Ended December 31 Interest Income Total Interest Income Interest Expense Total Interest Expense Total Interest Income (Loss) Non-Interest Income Total Non-interest Income Non-Interest Expenses Income (loss) before income tax and undistributed net income of bank subsidiary Income tax benefit Income (loss) before undistributed net income of bank subsidiary 2021 $ - 2020 $ - - 81,666 81,666 (81,666) - - 553,286 (634,952) 91,705 (543,247) - - - - - - - - - - - Equity in undistributed net income of bank subsidiary 11,271,208 NET INCOME $ 10,727,961 $ - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 45 STATEMENTS OF CASH FLOWS Years Ended December 31 OPERATING ACTIVITIES Net income 2021 2020 $ 10,727,961 $ - Equity in undistributed net income of bank subsidiary $ (11,271,208) Adjustments to reconcile net income to net cash provided by Operating Activities Share-Based Compensation (Increase) in: Intercompany Receivable Increase in: Increase in Intercompany Payable Accrued Interest Payable Other Liabilities Net Cash Provided by Operating Activities INVESTING ACTIVITIES Investment in Subsidiaries Net Cash Used in Investing Activities FINANCING ACTIVITIES Proceeds from Subordinated Debt, Net of Issuance Costs Proceeds from Stock Options Net cash Provided by Financing Activities Net Increase in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year 22. Subsequent Events 6,494 81,807 (315,398) 1,013,255 81,666 21,462 346,039 (16,883,502) (16,883,502) 19,610,375 198,586 19,808,961 - - - - - - - - - - - - - $ 3,271,498 $ - - $ - $ 3,271,498 $ - The date to which events occurring after December 31, 2021, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 11, 2022, which is the date on which the financial statements were available to be issued. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SHAREHOLDER & COMPANY INFORMATION BOARD OF DIRECTORS H. JASON GOLD CHAIRMAN JOHN T. ROHRBACK VICE CHAIRMAN CYNTHIA CARTER ATWATER DIRECTOR JOSEPH M. ENGLISH III DIRECTOR KEVIN J. KOOMAN DIRECTOR LAUREN FRIEND MCKELVEY DIRECTOR BRANDON C. PARK DIRECTOR MAURY PEIPERL DIRECTOR JOSEPH J. THOMAS PRESIDENT & CEO EXECUTIVE OFFICERS & SENIOR LEADERSHIP TEAM SHAUN E. MURPHY SENIOR EXECUTIVE VICE PRESIDENT & CHIEF OPERATING OFFICER AND CHIEF RISK OFFICER RAJ MEHRA EXECUTIVE VICE PRESIDENT & CHIEF FINANCIAL OFFICER RICHARD A. HUTCHISON EXECUTIVE VICE PRESIDENT & CHIEF MORTGAGE OFFICER VICTORIA S. LOUCKS SENIOR VICE PRESIDENT & HEAD OF DEPOSIT PRODUCTS STEVE WITT SENIOR VICE PRESIDENT & MARKET PRESIDENT PRINCE WILLIAM COUNTY STEPHEN H. MACNABB SENIOR VICE PRESIDENT & MANAGING DIRECTOR, COMMERCIAL BANKING DARREN TULLY SENIOR VICE PRESIDENT & MARKET PRESIDENT, FAIRFAX KEVIN FERRYMAN SENIOR VICE PRESIDENT & HEAD OF SBA DIVISION SHAREHOLDER & COMPANY INFORMATION 47 Helping Businesses Thrive through industry expertise and customized solutions As a local, full-service community bank, our most important mission is to help our clients during times of need. When businesses needed capital during the Covid-19 crisis to fund their growth and secure their future, we were there for them. Here are some of the dynamic organizations we assisted: Putting our IDEAS to work when you need us most. Business Banking Personal Banking Mortgage Banking Visit us online at freedom.bank. CORPORATE HEADQUARTERS Freedom Financial Holdings, Inc. 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 Crowe LLP Washington, D.C. COMMON STOCK Freedom Financial Holdings, Inc. 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 in person with a virtual option and will be held on Thursday, April 28, 2022 at 4 pm Shareholders may participate in the meeting by logging into Zoom using the following Meeting ID: 826 9390 6010 and Passcode: 22030. Shareholders will have the ability to ask questions during the Annual Meeting via the "chat" function on the Zoom platform. 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 703-667-4167 703-663-2300 703-667-4170 MANASSAS MORTGAGE DIVISION SBA DIVISION 10611 BaIls Ford Road, Suite 110 Manassas, VA 20109 4211 Pleasant Valley Road Chantilly, VA 20151 500 Mamaroneck Avenue, Suite 400 Harrison, NY 10528 703-349-2210 703-766-6400 914-370-2061 freedom.bank OTCQX : FDVA 00DFDDF

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