Freedom Bank of Virginia
Annual Report 2022

Plain-text annual report

2022 ANNUAL REPORT Business Banking • Personal Banking • Mortgage Banking Our IDEAS Make the Difference BIAS TOWARD “YES” ENTREPRENEURIAL DNA BEST-IN-CLASS SERVICE & TECHNOLOGY 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 HISTORICAL PERFORMANCE TRENDS BUILDING SHAREHOLDER VALUE FDVA Market Cap vs. Share Price 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 (LOSS) 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 10, 2023 Dear Shareholders: On behalf of our directors and officers, we are pleased to present the 2022 Annual Report for Freedom Financial Holdings, Inc. that highlights our financial performance during the past year. These results were achieved during a period of massive transition in the economy as the Federal Reserve increased the Federal Funds rate by 425 basis points to fight inflation and liquidity began to leave the banking system. These cyclical changes pressured all banks cost of funds and contribution of market-sensitive, fee-based products, including mortgage banking. We successfully navigated this unique economic environment by turning to organic loan and deposit growth to sustain our profitability. The Company produced an attractive return on equity in 2022 of 13.6% and an increase in our stock price of 9.0% at a time when the KRE Index – which tracks regional bank stock prices – declined 17.1%. Notably, our strong earnings also increased our Tangible Book Value per share excluding Accumulated Other Comprehensive Income (AOCI) by 13.3% to $12.87, achieving our goal of a 10% annual increase. Freedom achieved net income for the full year 2022 of $10,563,572 or $1.45 per diluted share compared to net income of $10,727,961 or $1.46 per diluted share for the full year 2021. The bank’s core profitability was far improved with 21.8% loan growth in the year, a 10-basis point increase in our net interest margin to 3.6% and an improvement in our efficiency ratio to 61.1%. These results enabled the Company to overcome significant declines in mortgage revenue and Paycheck Protection Program (PPP) forgiveness income compared to prior year. The Company is fortunate to operate in the vibrant Washington DC MSA and our strategy to focus on entrepreneurs with talented banking professionals, growing regional offices, dedicated industry groups, and a leading digital platform is working. Freedom Bank has five unique business areas that provide a mix of revenues that are complementary in a very dynamic economy. Commercial Banking is comprised of ten bankers and portfolio managers and focuses on a variety of commercial and industrial enterprises as well as commercial real estate markets. We were able to increase portfolio loans by 21.8%, with commercial and industrial loans representing 23% of portfolio loans as of December 31, 2022. The Bank closed on $226.1 million of commercial loans and lines for 274 clients in 2022. We are proud of these loyal clients, and you will find tombstone announcements representing several notable businesses for which we provided new loans in 2022 at the back of this report. Community Banking includes five sales offices across Northern Virginia, and we were excited to relocate our Chantilly Branch and combine it with our Mortgage Division in early 2023. Our team opened $86.7 million in deposits for 758 clients in 2022 and launched several new deposit products, most notably our new Freedom2Earn interest checking account. This led to strong deposit growth of 22.1% in 2022, with non-interest deposit balances now representing 22.8% of total deposits and cost of funds was 0.89 % for the full year 2022. Treasury Services includes a team of six professionals providing state-of-the-art technology-focused banking services to our business clients. We offer payment solutions on the Q2 and Fiserv platforms, Merchant Service through a strategic partnership with Fiserv/First Data and Business Credit Cards offered through a strategic partnership with Elan Financial Services. We also launched online account opening capabilities for business and consumer accounts and a new digital invoicing and payment solution for business clients powered by Autobooks. SBA Banking has grown to ten experienced SBA Bankers offering SBA 7(a) and 504, USDA, and Bureau of Indian Affairs guaranteed loans to meet the needs of Freedom’s clients in the DC Region and new clients throughout the East Coast. The team generated loan production of $24.5 million for the 12 months ended December 31, 2022. Notably, the Bank is approved to offer loan products under the Small Business Association’s Preferred Lender Program in 2022 that enables us to make government guaranteed loans without prior SBA approval and improve competitiveness and closing times. 02 A LETTER TO OUR SHAREHOLDERS Mortgage Banking is comprised of 15 mortgage loan officers and a dedicated operations team. We generated residential loan production of $148.2 million in 2022, including $33.6 million of jumbo loans that were held in our portfolio. We offer an extensive list of products, including VA, FHA, VHDA, and USDA mortgages, all of which are extremely helpful to drive purchase volume and support first-time home buyers. The pandemic years galvanized our talented group of leaders and our team of amazing employees at the Company differentiates us with clients and continues to drive our success. We utilized internal employee referrals to hire 31 new employees in 2022 to strengthen our team and build capabilities. We were excited to hire a new Market President for Loudoun County responsible for building lead relationships and accelerating the Bank’s growth in this key market. We held our first-ever Freedom Day connecting all employees in person including remote employees from around the country. It was an opportunity to celebrate our accomplishments in 2022 and discuss our strategic plans for the year ahead. The event also included a company-wide service project for Veterans Moving Forward and Soldiers' Angels. The conclusion from this time together was that 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, our Board of Directors approved a new mission and strategy for the Freedom Bank Foundation focused on economic inclusion to make the communities Freedom Bank serves more vibrant and more equitable. The Foundation held our inaugural Fall Gala to raise funds for the NOVA Freedom Fund. The Gala successfully raised over $110,000 for the Fund, which makes loans to entrepreneurs of color in the DC region administered by the Community Business Partnership, Inc. The Company also has a dedicated commitment to Diversity, Equity, Inclusion and Belonging led by the Freedom DEI&B Committee with intentional training and coaching to ensure every employee flourishes. We have completed a company-wide Diversity training led by a third-party instructor for the Board of Directors and all employees to elevate the awareness of unconscious bias and promote great empathy and understanding at work. As we reflect on the milestones and success of 2022, we are energized for the year ahead. We anticipate that the economy will continue to experience persistent inflation that will result in ongoing challenges for rising funding costs and ultimately credit quality concerns. We have been investing heavily in our sales culture, deposit gathering capability and portfolio management infrastructure to prepare for this reality. These efforts include expanding upon our branch footprint, industry focus, and digital products. The Company is poised for this environment with a very strong balance sheet with Tier 1 Capital of 13.4% and abundant on- and off-balance sheet liquidity. We are now planning and preparing to cross over the $1.0 billion in total asset threshold in 2023 that will require us to implement additional risk management infrastructure, including adopting Current Expected Credit Losses (CECL) methodology on January 1, 2023. Within our team, we have a line of sight for succession as we expand our reach and, more importantly, increase depth to scale the organization for our next chapter of growth. We believe that our IDEAS Core Values – Innovation, Discipline, Experience, Attitude and Service – will continue to serve as our guide for the Company as we continue to serve our clients and communities. 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 Stockholders and the Board of Directors of Freedom Financial Holdings, Inc. Fairfax, Virginia Opinion on the Financial Statements Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm 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, 2022 and 2021, the related consolidated statements of operations, comprehensive income (loss), Fairfax, Virginia changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present Opinion on the Financial Statements fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with 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 accounting principles generally accepted in the United States of America. 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 (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, Basis for Opinion 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 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. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with Basis for Opinion the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of 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 the Securities and Exchange Commission and the PCAOB. 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 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 We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards 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. generally accepted in the United States of America. Those standards require that we plan and perform the audit to 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 obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to 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 error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its 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. As part of our audits, we are required to obtain an understanding of internal control over 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 financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal 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 control over financial reporting. Accordingly, we express no such opinion. 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. Accordingly, we express no such opinion. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included 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 examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits 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 also included evaluating the accounting principles used and significant estimates made by management, as well as 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 evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for 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. our opinion. 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 Critical Audit Matter 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 The critical audit matter communicated below is a matter arising from the current period audit of the financial statements 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. that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts 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) 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 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 evaluation for directional consistency and obtaining evidence for significant changes. We have served as the Company's auditor since 2021. Washington, D.C. March 10, 2023 Crowe LLP INDEPENDENT AUDITOR’S REPORT 05 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31 2022 and 2021 ASSETS Cash and due from financial institutions Interest-bearing deposits with banks Cash and Cash Equivalents Securities available-for-sale 2022 $ 2,099,062 2021 $ 2,536,450 32,674,953 31,696,891 34,774,015 34,233,341 181,558,037 171,532,394 Securities held to maturity (fair value 2022 - $14,634,802; 2021 - $17,995,774) 17,096,010 18,012,874 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 3,889,200 3,321,250 5,064,385 13,297,125 700,003,008 602,369,321 (7,614,120) (6,486,120) 692,388,888 595,883,201 977,393 1,139,204 3,784,076 2,466,712 6,629,622 1,631,115 26,248,974 24,579,879 1,736,285 2,704,888 16,484,808 7,870,617 $990,631,693 $876,672,600 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, 2022 and 2021 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: 6,583,328 and 6,676,545 shares issued and outstanding at December 31, 2022 and 2021, respectively (includes 72,069 and 86,788 unvested shares, respectively) Non-Voting Common Stock: 673,000 shares issued and outstanding at December 31, 2022 and 2021, respectively Additional paid-in capital Accumulated other comprehensive income (loss), net Retained earnings Total Stockholders’ Equity 2022 2021 $ 187,416,628 $ 222,167,095 409,760,574 300,361,979 5,977,828 5,841,800 245,840,048 173,322,527 848,995,078 701,693,401 25,000,000 29,035,714 5,826,298 32,055,915 19,674,794 19,616,869 1,265,796 294,237 1,862,773 2,823,885 13,060,825 6,993,855 $ 915,685,564 $ 792,513,876 - - 65,113 65,898 6,730 6,730 58,241,499 59,884,615 (17,480,994) 651,272 34,113,781 23,550,209 74,946,129 84,158,724 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 990,631,693 $ 876,672,600 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 2022 and 2021 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/call of investment securities Service charges and other income Loan servicing income Swap fee income Increase in cash surrender value of bank-owned life insurance 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 2022 $ 32,213,808 2021 $ 28,335,210 5,521,973 2,607,476 589,783 601,382 528,259 86,903 38,926,946 31,557,848 6,512,624 826,392 7,339,016 2,275,780 766,060 3,041,840 31,587,930 28,516,008 1,248,000 839,000 30,339,930 27,677,008 2,271,630 7,085,806 997,967 19,262 1,442,681 218,190 68,404 669,095 5,687,229 437,825 5,706 1,456,600 192,413 - 544,665 9,723,015 15,160,439 16,341,245 1,266,050 1,232,056 705,170 363,099 1,062,306 1,212,233 448,904 990,442 355,710 1,209,644 662,050 267,583 1,365,057 1,181,347 329,059 778,069 1,141,200 846,850 22,773,997 24,144,516 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 2022 2021 13,253,162 13,255,507 2,689,588 2,527,546 $ 10,563,574 $ 10,727,961 EARNINGS PER COMMON SHARE – BASIC $ 1.45 $ 1.47 EARNINGS PER COMMON SHARE – DILUTED $ 1.45 $ 1.46 WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – DILUTED 7,285,726 7,316,505 7,307,659 7,363,536 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Years Ended December 31 2022 and 2021 Net Income Other Comprehensive Income: Unrealized losses on securities: Unrealized holdings loss arising during the period Reclassification adjustment for losses (gains) included in net income Tax effect Net of Tax Unrealized gains on cash flow hedge: Unrealized holdings gain arising during the period Reclassification adjustment for losses (gains) included in net income Tax effect Net of Tax Total Other Comprehensive Loss 2022 2021 $ 10,563,574 $ 10,727,961 (24,717,529) (1,551,958) (19,262) (5,706) 5,194,728 360,284 (19,542,063) (1,197,380) 1,784,555 663,273 - - (374,758) (155,275) 1,409,797 507,998 (18,132,266) (689,382) COMPREHENSIVE INCOME (LOSS) $ (7,568,692) $ 10,038,579 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 2022 and 2021 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, 2021 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 (12,576) 615 474,785 - - - - - - 10,727,961 10,727,961 - - - - - (689,382) 198,586 (12,117) 615 474,785 BALANCE, DEC. 31, 2021 7,262,757 $ 72,628 $59,884,615 $ 651,272 $23,550,209 $ 84,158,724 Net income Other comprehensive loss - - - - - - Common stock repurchased (173,400) (1,734) (2,462,312) Stock options exercised Restricted stock - vested, net of shares withheld Stock-based compensation - restricted stock 45,739 49,163 457 492 283,124 (96,442) - - 632,514 - 10,563,572 10,563,572 (18,132,266) - - - - - - - - - (18,132,266) (2,464,046) 283,581 (95,950) 632,514 BALANCE, DEC. 31, 2022 7,184,259 $ 71,843 $58,241,499 $ (17,480,994) $34,113,781 $ 74,946,129 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 2022 and 2021 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/calls 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 Subordinated debt amortization expense Earnings on bank-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 by Operating Activities 2022 2021 $ 10,563,574 $ 10,727,961 1,248,000 165,988 393,975 (180,311) (19,262) 839,000 186,309 1,207,356 (272,026) (5,706) (2,271,630) (7,085,806) (997,967) (437,825) (234,849,336) (336,806,440) 247,668,382 376,442,023 12,255,948 536,564 57,925 (669,095) 7,491 3,767,920 463,283 6,494 (544,665) 30,739 (1,317,364) (3,327,862) 402,156 (724,930) 971,559 2,566,970 (186,579) (1,590,381) 32,803,549 46,418,883 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 2022 and 2021 CASH FLOWS FROM INVESTING ACTIVITIES 2022 2021 Available-for-sale securities: Proceeds from sales Maturities, prepayments and calls Purchases Held-to-maturity securities: Maturities, prepayments and calls Purchases (Purchase) 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 bank-owned life insurance 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 18,545,768 31,665,477 (53,682,915) (110,206,241) - 8,404,493 916,864 (10,285,000) (567,950) 286,550 (116,051,047) (81,114,911) - (53,887,807) 26,229,618 122,747,732 (21,504,915) (3,624,581) - (39,999,994) (4,177) (27,104) (1,000,000) (7,000,000) (147,118,754) (141,604,205) $ 147,301,677 $ 153,204,567 75,000,000 15,000,000 (79,035,714) (16,035,715) Advances from the Payment Protection Plan Liquidity Facility (“PPPLF”) - 53,887,807 Repayment of advances from the PPPLF Proceeds from subordinated debt, net of issuance costs Proceeds from stock options Repurchase of common stock Net Cash Provided by Financing Activities (26,229,617) (123,782,912) - 19,610,375 283,581 198,586 (2,464,046) - 114,855,881 102,082,708 Net Increase in Cash and Cash Equivalents 540,674 6,897,386 Cash and Cash Equivalents, Beginning of Year 34,233,341 27,335,955 CASH AND CASH EQUIVALENTS, END OF YEAR $ 34,744,015 $ 34,233,341 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 2022 and 2021 SUPPLEMENTAL NONCASH DISCLOSURES 2022 2021 Unrealized loss on securities available-for-sale, net $ (24,736,791) $ (1,557,664) Loans transferred (to)/from held-for-sale from/to portfolio $ (2,314,677) $ (799,191) Right-of-use assets obtained in exchange for lease liabilities $ - $ 372,153 Unrealized gain on cash flow derivative $ 1,784,555 $ 663,273 Unfunded commitment on limited partnership investments $ 3,500,000 $ 3,033,013 SUPPLEMENTAL INFORMATION Cash paid during the year for interest Cash paid during the year for income taxes $ 6,367,457 $ 3,228,419 $ 2,085,000 $ 3,400,000 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, 2022 AND 2021 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 and is subject to the rules and regulations of the Virginia State Banking Commission, the Federal Reserve and the Federal Deposit Insurance Corporation (“FDIC”). The 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”), 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 organization 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 amounts of revenue and expenses during the reporting period. Significant estimates affecting the Company’s financial 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 in 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 $218,190 and $192,413 for the years ended December 31, 2022 and 2021, 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, 2022 and 2021. 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 and other holder (a “Related Holder”) of the Corporation’s 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 2022 2021 7,285,726 7,316,505 21,933 47,031 7,307,659 7,363,536 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS There were no antidilutive options for the year ended December 31, 2022 and 2021. 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 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/(LOSS) Comprehensive income/(loss) 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, loan swap fee income, 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 The FASB issued topic 326 to replace the incurred loss model for loans and other financial assets with an expected loss model, which is referred to as the current expected credit loss (CECL) model. The CECL model is applicable to the measurement of credit losses on financial assets measured at amortized cost, including loan receivables and held-to maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 financial guarantees, and other similar instruments) and net investments in certain leases recognized by a lessor. In addition., the amendments in Topic 326 require credit losses on available-for-sale to be presented as a valuation allowance rather than as a direct write-down on. The CECL standard became effective for the Company on January 1, 2023. Management continues to refine assumptions, analyze forecast scenarios, and stress test the volatility of the model. Additionally, management is finalizing various accounting processes, and related controls. The ongoing impact of adopting CECL are dependent on various factors, including credit quality, macroeconomic forecasts and conditions, composition of the loan and securities portfolios, and other management judgments. Interagency guidance issued in December 2018 allows for a three-year phase-in of the cumulative-effect adjustment for regulatory capital reporting. The Company does not anticipate deferring the day one impact of adoption over a three-year period. 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. In January 2021, the FASB issued ASU 2021-01 which clarified that all derivative instruments affected by the changes to interest rates used for discounting, margining or contract price alignment, regardless of whether they reference LIBOR or another rate expected to be discounted as a result of reference rate reform, an entity may apply certain practical expedients in Topic 848. 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, 2022 and 2021 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, 2022 and 2021 was $0. 3. Investment Securities The following table summarizes the amortized cost and fair value of securities available-for-sale and securities held-to- maturity at December 31, 2022 and 2021 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses: 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEC. 31, 2022 Available-for-sale Corporate notes Agency notes Mortgage-backed securities Municipal securities - tax exempt Municipal securities - taxable SBA loan pools Asset-backed securities Private-label mortgage-backed securities Private-label commercial mortgage-backed securities AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ 40,939,981 $ 28,982 $ (4,979,073) $ 35,989,890 1,000,000 66,301,194 11,294,174 25,100,769 6,491,553 10,111,316 18,758,417 4,847,507 - - - - (34,633) 965,367 (8,995,673) 57,305,521 (1,503,101) 9,791,073 (5,234,667) 19,866,102 18,835 72,924 (90,987) (292,766) 6,419,401 9,891,474 - - (2,963,754) 15,794,663 (113,798) 4,733,709 Private-label collateralized loan obligations 21,220,233 13,743 (433,139) 20,800,837 Total Available-for-sale $ 206,065,144 $ 134,484 $ (24,641,591) $ 181,558,037 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 $ - $ (528,960) $ 3,471,040 11,242,783 1,853,227 4,028 (1,412,437) - (523,839) 9,834,374 1,329,388 Total Held-to-maturity $ 17,096,010 $ 4,028 $ (2,465,236) $ 14,634,802 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 The amortized cost and fair value of securities are shown by contractual maturity. Expected maturities may differ from contractual maturities if borrowers 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: 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 $ 774,000 $ 773,997 $ - $ - 11,021,659 10,439,366 952,422 869,763 49,613,613 44,526,264 4,000,000 3,471,040 54,748,754 47,984,517 12,143,588 10,293,999 116,158,026 103,724,144 17,096,010 14,634,802 Mortgage-backed securities 89,907,118 77,833,893 - - $ 206,065,144 $181,558,037 $ 17,096,010 $ 14,634,802 Securities pledged at year-end 2022 and 2021 had a carrying amount of $76,304,307 and $0. All securities were pledged to the Federal Home Loan Bank (FHLB) to secure contingent liquidity. Information pertaining to securities with gross unrealized losses at December 31, 2022, aggregated by investment category and length of time that individual securities have been in a continuous loss position, is as follows: LESS THAN 12 MONTHS OVER 12 MONTHS TOTAL GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE $ 1,211,963 $19,765,814 $ 3,767,110 $14,695,095 $ 4,979,073 $34,460,909 34,633 965,367 - - 34,633 965,367 DEC. 31, 2022 Available-for-sale Corporate notes Agency notes Mortgage-backed securities 2,738,434 32,460,618 6,257,239 24,847,600 8,995,673 57,308,218 Municipal securities - tax exempt 653,145 5,801,833 849,956 3,989,240 1,503,101 9,791,073 Municipal securities - taxable 657,339 4,011,934 4,577,328 15,854,168 5,234,667 19,866,102 SBA loan pools Asset-backed securities Private-label mortgage-backed securities Private-label commercial mortgage-backed securities Private-label collateralized loan obligations 18,150 2,287,944 72,837 2,807,755 90,987 5,095,699 108,602 4,579,351 184,164 1,824,356 292,766 6,403,707 242,088 2,344,048 2,721,666 13,450,615 2,963,754 15,794,663 113,798 4,733,709 - - 113,798 4,733,709 204,006 11,091,217 229,133 5,777,900 433,139 16,869,117 TOTALS $ 5,982,158 $ 88,041,835 $ 18,659,433 $ 83,246,729 $ 24,641,591 $171,288,564 GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE Held-to-maturity Corporate notes $ 528,960 $ 3,471,040 $ - $ - $ 528,960 $ 3,471,040 Municipal securities - tax exempt Municipal securities - taxable - - - - 523,839 1,329,388 523,839 1,329,388 1,412,437 5,489,750 1,412,437 5,489,750 $ 528,960 $ 3,471,040 $ 1,936,276 $ 6,819,138 $ 2,465,236 $10,290,178 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LESS THAN 12 MONTHS OVER 12 MONTHS TOTAL GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE GROSS UNREALIZED LOSSES FAIR VALUE $ 735,480 $ 17,724,598 $ 17,500 $ 482,500 $ 752,980 $18,207,098 DEC. 31, 2021 Available-for-sale Corporate notes Mortgage-backed securities 467,468 31,363,925 101,621 3,228,472 569,089 34,592,397 Municipal securities - tax exempt 16,702 2,339,460 - - 16,702 2,339,460 Municipal securities - taxable 252,622 10,797,126 8,742 246,258 261,364 11,043,384 SBA loan pools 30,426 2,892,392 54,647 1,677,044 85,073 4,569,436 Asset-backed securities 11,772 2,000,507 Private-label mortgage-backed securities Private-label collateralized loan obligations 125,488 15,896,175 1,983 4,007,840 - - - - - - 11,772 2,000,507 125,488 15,896,175 1,983 4,007,840 TOTALS $ 1,641,941 $ 87,022,023 $ 182,510 $ 5,634,274 $1,824,451 $92,656,297 GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE Held-to-maturity Municipal securities - tax exempt $ 30,914 $ 1,216,693 $ - $ - $ 30,914 $ 1,216,693 Municipal securities - taxable - - 123,963 1,894,024 123,963 1,894,024 $ 30,914 $ 1,216,693 $ 123,963 $ 1,894,024 $ 154,877 $ 3,110,717 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, 2022, 128 debt securities with an unrealized loss for less than one year and 117 debt securities with an unrealized loss for greater than one year depreciated approximately 12.99 percent from the Company’s amortized cost basis. 103 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, twenty-two are tax-exempt municipal securities, thirty-three are taxable municipal securities, fourteen are Small Business Administration (SBA) securities, thirty-four corporate bonds, nineteen private-label MBS/CMBS, seven Asset Based Security (ABS), and thirteen 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. Proceeds Gross gains Gross losses 2022 2021 $ 2,004,021 $ 1,437,181 20,503 1,241 19,199 13,493 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 The tax provision related to these net realized gains and losses was $4,032 and $1,337 for the years ended December 31, 2022 and 2021, respectively. 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 2022 2021 $ 2,296,800 $ 1,782,750 1,526,400 1,472,500 66,000 66,000 $ 3,889,200 $ 3,321,250 2022 2021 $ 159,581,315 $ 131,697,086 382,308,395 350,262,626 42,360,588 33,462,692 85,988,119 54,346,882 30,132,305 33,682,890 700,370,722 603,452,176 (367,714) (1,082,855) 700,003,008 602,369,321 (7,614,120) (6,486,120) $ 692,388,888 $ 595,883,201 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 mortgage loans and home equity lines of credit and term loans secured primarily by the residences of borrowers. Residential mortgage loans and 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS home equity lines of credit secured by owner-occupied property generally are made with a loan-to-value ratio of up to 80 percent. Consumer loans: This portfolio consists of car loans, boat loans, loans secured by stock and unsecured loans. The consumer loans are generally made to borrowers with a minimum credit score of 700 and a maximum debt to income ratio of 40%. An analysis of the allowance for possible loan losses based on type or loan segment, which identifies certain loans that are evaluated for individual or collective impairment, as of December 31 is as follows: YEAR 2022 Allowance for Loan Losses COMMERCIAL & INDUSTRIAL REAL ESTATE - COMMERCIAL REAL ESTATE - CONSTRUCTION REAL ESTATE - RESIDENTIAL CONSUMER TOTAL Beginning balance $ 852,510 $ 4,443,641 $ 458,819 $ 390,928 $ 340,222 $ 6,486,120 Charge-offs Recoveries Provision - - - - - - - - (189,910) (189,910) 69,910 69,910 570,703 73,996 76,186 301,179 225,936 1,248,000 Ending Balance $ 1,423,213 $ 4,517,637 $ 535,005 $ 692,107 $ 446,158 $ 7,614,120 Individually evaluated for impairment - - - - - - Collectively evaluated for impairment 1,423,213 4,517,637 535,005 692,107 446,158 7,614,120 Loans Receivable Ending Balance $159,581,315 $382,308,395 $ 42,360,588 $ 85,988,119 $ 30,132,305 $700,370,722 Individually evaluated for impairment $ 5,892,514 $ 10,198,142 $ - $ - $ - $ 16,090,656 Collectively evaluated for impairment 153,688,801 372,110,253 42,360,588 85,988,119 30,132,305 684,280,066 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 An analysis of non-accrual and past due loans is as follows at December 31: 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 YEAR 2022 Commercial and industrial $ - $ - $1,282,596 $1,282,596 $158,298,719 $159,581,315 $ 1,282,596 Real estate - commercial Real estate - construction - - Real estate - residential 668,619 - - - - - 7,355,963 7,355,963 374,952,432 382,308,395 7,355,963 - - - - 42,360,588 42,360,588 668,619 85,319,500 85,988,119 - 30,132,305 30,132,305 - - - $ 668,619 $ - $8,638,559 $9,307,178 $691,063,544 $700,370,722 $ 8,638,559 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 Consumer TOTALS YEAR 2021 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 - - - - - - - - - - - - 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 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 $ 5,892,514 $ 5,892,514 $ - $ 6,293,628 $ 317,958 YEAR 2022 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 10,198,142 10,198,142 - - - - - - - - - - - - - - - - Commercial and Industrial 5,892,514 5,892,514 Real Estate - Commercial Real Estate - Construction Real Estate - Residential Consumer 10,198,142 10,198,142 - - - - - - - - - - - - - - - - - - - - 10,343,057 175,403 - - - - - - - - - - - - - - - - 6,293,628 10,343,057 317,958 175,403 - - - - - - $ 16,090,656 $ 16,090,656 $ - $ 16,636,685 $ 493,361 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Cash basis income recognized approximates interest income recognized as of December 31, 2022 and 2021. No additional funds are committed to be advanced in connection with the impaired loans. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 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. An analysis of the credit quality indicators is as follows at December 31: YEAR 2022 PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL Commercial and industrial $137,818,670 $ 15,870,131 $ 5,892,514 $ - $ - $159,581,315 Real estate - commercial 361,537,398 10,572,855 10,198,142 Real estate - construction 39,939,820 2,420,768 85,988,119 30,132,305 - - - - - - - - - - - - - 382,308,395 42,360,588 85,988,119 30,132,305 $655,416,312 $ 28,863,754 $ 16,090,656 $ - $ - $700,370,722 PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL Real estate - residential Consumer TOTALS YEAR 2021 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 - - Real estate - residential Consumer TOTALS 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 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, 2022 and December 31, 2021, 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, 2022 and December 31, 2021. PAYCHECK PROTECTION PROGRAM 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 Paycheck 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) loan 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 of 2020. As of December 31, 2022, and 2021 there were 21 and 178 PPP loans with an outstanding balance of $5.83 million and $32.36 million, respectively. These loans have $158,966 and 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $873,828 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. OTHER MATTERS Loans to principal officers, directors, and their affiliates were $6,717,583 and $6,228,202 at December 31, 2022 and 2021, respectively. New loans made to such related parties amounted to $676,338, and repayments amounted to $186,957 in 2022. There were no loans paid off during the year ended December 31, 2022 which had an outstanding balance as of 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 2022 2021 $ 1,522,155 $ 1,520,382 1,468,327 1,465,923 181,211 181,211 3,171,693 3,167,516 (2,194,300) (2,028,312) NET BANK PREMISES AND EQUIPMENT $ 977,393 $ 1,139,204 Depreciation and amortization of Company premises and equipment charged to expense amounted to $165,988 and $186,309 in 2022 and 2021, respectively. 6. Other Assets Other Assets include the following as of December 31: Investment in limited partnership - Small Business Investment Company 2022 $ 3,495,674 2021 $ 1,495,674 Investment in limited partnership - Low Income Housing Investment Fund 4,341,562 3,247,613 Accounts receivable Interest rate lock commitment Prepaid expenses Fair value of derivative instruments Other assets TOTAL 799,470 49,351 967,851 752,113 183,807 739,704 6,065,011 1,305,527 765,889 146,179 $ 16,484,808 $ 7,870,617 During the year ended December 31, 2022, the Company committed $2 million to a Small Business Investment Company (“SBIC”) with a sector focus in Digital Media, E-commerce Platforms, Cybersecurity, and Software. The investment is scheduled to phase in via General Partner (“GP”) capital calls beginning in the first quarter of 2023 and phasing in entirely over an estimated twenty-four month period. The Company has elected to account for the investment under the equity method; therefore the fair value of the Company’s investment is recorded quarterly to the Statement of Operations. The Company has recognized a liability, in other liabilities, representing the unfunded portion of the partnership commitment. During the year ended December 31, 2022, the Company had not received any capital calls. There were no capital calls during the year ended December 31, 2021 as the Company was not a limited partner at that time. During the year ended December 31, 2022, the Company committed $1.5 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 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, 2022, the Company had received and paid capital calls for $22,695. There were no capital calls during the year ended December 31, 2021 as the Company was not a limited partner at that time. 7. Deposits The following are time deposits maturing in years ending December 31: 2023 2024 2025 2026 2027 THEREAFTER TOTAL $ 205,661,692 28,002,725 4,923,429 1,480,304 5,731,444 40,454 $ 245,840,048 Time deposits in denominations that meet or exceed the FDIC minimum limit of $250,000 or more totaled $46,752,857 and $58,971,179 at December 31, 2022 and 2021, respectively. The Company held related party deposits of $13,520,936 and $5,521,014 at December 31, 2022 and 2021, respectively. 8. Borrowings and Advances The Company’s borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $25.0 million and $29.04 million at December 31, 2022 and 2021, respectively. At December 31, 2022 and 2021, the weighted average rates on FHLB advances were 3.01% and 0.67%, 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 $147.6 million and $93.5 million, respectively. FHLB advances are subject to prepayment penalties. During the year ended December 31, 2022 and 2021, 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 or re-borrow funds on different terms. The Company had $20.0 million and $0 in callable FHLB advances at December 31, 2022 and 2021. Advances from the FHLB are summarized by year of maturity and weighted average interest rate at December 31, 2022: 2023 2024 2025 2026 2027 THEREAFTER TOTAL AMOUNT WEIGHTED AVERAGE RATE $ 5,000,000 4.15% - - - - N/A N/A N/A N/A 20,000,000 2.72% $ 25,000,000 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company has utilized the Federal Reserve Board’s (“FRB”) Paycheck Protection Program Liquidity Facility (“PPPLF”) to provide match funding for Paycheck Protection Program (“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 $5.83 million and $32.06 million at December 31, 2022 and 2021, respectively. The weighted average rate on PPPLF advances was 0.35% at December 31, 2022 and 2021. 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 is 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 $19,674,794 and $19,616,869 as of December 31, 2022 and 2021, respectively. 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 2022 2021 $ 2,369,779 $ 763,281 2,553,057 2,269,732 2,023,945 2,620,438 375,134 100,619 3,685,744 1,952,547 199,859 188,108 710,815 241,622 $ 13,060,825 $ 6,993,855 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 11. Income Taxes Year-end deferred tax assets and liabilities were due to the following: Deferred Tax Assets Allowance for loan losses Unearned loan fees and costs, net Accrued compensation Non-accrual loan interest Unrealized losses on securities Restricted stock Lease liability Other Deferred Tax Liabilities Depreciation Unrealized gains on securities Unrealized gains on cash flow hedges Right-of-use asset Interest rate lock Other NET DEFERRED TAX ASSET Income tax expense was the following as of December 31: Current tax expense Federal State Deferred tax expense (benefit) Federal State 2022 2021 $ 1,694,062 $ 1,409,601 46,633 317,100 - 5,146,493 79,349 391,182 6,605 38,145 437,358 19,337 - 75,818 593,016 19,777 7,681,424 2,593,052 177,022 - 499,646 363,586 10,037 1,511 181,713 48,233 124,890 567,155 39,946 - 1,051,802 961,937 $ 6,629,622 $ 1,631,115 2022 2021 $ 2,691,951 $ 2,678,042 177,948 121,530 (162,056) (259,820) (18,255) (12,206) $ 2,689,588 $ 2,527,546 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 Unrecognized tax benefits, net Stock compensation Low-income housing investment benefit Other 2022 $ 2,783,163 2021 $ 2,783,657 126,157 (100,299) (140,510) (31,017) (111,036) (100,272) 263,402 86,639 (102,674) (114,380) (31,380) (65,354) (60,911) 31,949 $ 2,689,588 $ 2,527,546 A reconciliation of the beginning and ending amount of unrecognized tax benefits are as follows: Balance, beginning of year Increases related to prior tax positions Decreases related to prior tax positions Increases related to current tax positions Settlements Lapse of statute Balance, end of year 2022 $ 36,036 2021 $ 69,605 - - - - - - - - (36,036) (33,569) $ - $ 36,036 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 for the tax periods ending after December 31, 2018. 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 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, 2022 and 2021 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, 2022 Total capital (to risk-weighted assets) Freedom Finanical Holdings, Inc. $118,841,244 14.28% $ 87,414,157 10.50% N/A N/A The Freedom Bank of Virginia $118,916,163 14.28% $ 87,414,157 10.50% $ 83,251,579 10.00% Tier 1 capital (to risk-weighted assets) Freedom Finanical Holdings, Inc. $ 74,946,130 9.00% $ 70,763,842 8.50% N/A N/A The Freedom Bank of Virginia $111,302,044 13.37% $ 70,763,842 8.50% $ 66,601,263 8.00% Common Equity Tier 1 (to risk-weighted assets) Freedom Finanical Holdings, Inc. $ 92,427,124 11.10% $ 58,276,105 7.00% N/A N/A The Freedom Bank of Virginia $111,302,044 13.37% $ 58,276,105 7.00% $ 54,113,526 6.50% Tier 1 capital (to adjusted average assets) Freedom Finanical Holdings, Inc. $ 92,427,124 9.40% $ 39,325,794 4.00% N/A N/A The Freedom Bank of Virginia $111,302,044 11.32% $ 39,314,558 4.00% $ 49,143,198 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, 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% 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, 2022, $28,656,010 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 $50 million and $24 million as of December 31, 2022 and 2021, respectively, 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, 2022 and 2021 were $25,189,189 and $25,932,608, 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, 2022. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 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 $ 40,000,000 $ 14,000,000 $ - $ - Brokered Time Deposits $ 10,000,000 $ 10,000,000 $ - $ - 2022 2021 2022 2021 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: 2022 2021 NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE Included in other liabilities: Derivatives designated as hedges: Interest rate swaps related to brokered deposits $40,000,000 $ 1,486,587 $14,000,000 $ 379,789 Interest rate swaps related to brokered time deposits 10,000,000 892,680 10,000,000 214,923 TOTAL INCLUDED IN OTHER LIABILITIES $50,000,000 $ 2,379,267 $24,000,000 $ 594,712 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: 2022 AMOUNT OF GAIN 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 $ 1,879,621 N/A 2021 $ - AMOUNT OF GAIN 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 $ - For the years ended December 31, 2022 and 2021 there was no gain or loss recognized in income on cash flow hedging relationships. 36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2022: 2007 Plan 1,075,280 895,612 336,198 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, 2022 and 2021, there was no remaining amortization expense to be recognized on outstanding stock options. The intrinsic value of options exercised during 2022 and 2021 was $382,835 and $246,154 respectively. The weighted average remaining contractual life of options outstanding was 2.64 and 1.78 years for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022 all outstanding options are fully vested. The intrinsic value of these fully vested options at December 31, 2022 was $203,460. The following summarizes the option activity under the Plan: BALANCE AT JANUARY 1, 2021 115,038 $ 6.73 NUMBER OF SHARES WEIGHTED AVERAGE EXERCISE PRICE Grants Exercised Expired Forfeited BALANCE AT DECEMBER 31, 2021 Grants Exercised Expired Forfeited - (33,264) (3,589) - 78,185 - (45,739) - - - 5.97 6.27 - 7.07 - 6.20 - - BALANCE AT DECEMBER 31, 2022 32,446 $ 8.30 There were no stock options granted during the years ended December 31, 2022 and 2021. 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, 2022, 42,100 voting common shares of restricted stock were granted to Company employees. 32,100 shares were granted as part of a time-based restricted stock agreement with a weighted fair value of NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 $13.92 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 $14.15 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, 2023. At December 31, 2022, there was $490,331 in unrecognized compensation expense related to non-vested restricted stock awards that are expected to be recognized over a weighted average period of 3.01 years. At December 31, 2021, there was $548,584 in unrecognized compensation expense related to non-vested restricted stock awards. The following summarizes the restricted stock activity under the Plan: BALANCE AT JANUARY 1, 2021 Grants Vested Expired Forfeited BALANCE AT DECEMBER 31, 2021 Grants Vested Expired Forfeited BALANCE AT DECEMBER 31, 2022 NUMBER OF SHARES 100,002 36,850 (46,930) - (3,134) 86,788 42,100 (55,819) - (1,000) 72,069 WEIGHTED AVERAGE FAIR VALUE $ 10.68 11.01 10.65 - 10.18 10.85 13.97 11.20 - 14.03 $ 12.36 For the years ended December 31, 2022 and 2021, the Company recognized $632,514 and $474,785 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 two months to ninety-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. 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 $ 1,736,285 $ 2,704,888 BALANCE SHEET CLASSIFICATION DEC. 31, 2022 DEC. 31, 2021 Lease liabilities: Operating leases Lease liability $ 1,862,773 $ 2,823,885 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Lease Expense The components of total lease cost were as follows for the period ending: Operating lease cost Lease Obligations DECEMBER 31, 2022 DECEMBER 31, 2021 $ 1,024,653 $ 996,600 Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2022 are as follows: 2023 2024 2025 2026 2027 THEREAFTER Total undiscounted lease payments Less: imputed interest Net lease liabilities Supplemental Lease Information OPERATING LEASE OPERATING LEASE $ 881,243 $ 1,019,358 340,979 309,324 118,421 97,115 164,356 1,911,438 48,665 831,225 329,996 295,504 118,421 261,471 2,855,975 32,090 $ 1,862,773 $ 2,823,885 Operating lease weighted average remaining lease term (years) Operating lease weighted average discount rate 3.68 2.18% 3.90 2.24% DECEMBER 31, 2022 DECEMBER 31, 2021 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 an 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 2022 Available-for-sale securities $181,558,037 $ - $181,058,037 $ 500,000 Interest rate lock commitment Cash flow derivatives Servicing rights asset 2021 49,351 2,379,267 255,813 - - - - 49,351 2,379,267 255,813 - - $184,242,468 $ - $183,693,117 $ 549,351 Available-for-sale securities $171,532,394 $ - $171,532,394 $ - Interest rate lock commitment Cash flow derivatives Servicing rights asset 183,807 594,712 56,343 - - - - 183,807 594,712 56,343 - - $172,367,256 $ - $172,183,449 $ 183,807 40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents recurring level III assets: BALANCE AT JANUARY 1, 2021 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, 2021 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 $ 2,339,104 $ 870,844 - - (839,104) (1,500,000) - - (687,037) - - - - - $ - $ 183,807 - - - 500,000 - - (134,456) - - - - - BALANCE AT DECEMBER 31, 2022 $ 500,000 $ 49,351 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. There were no financial assets that were measured at fair value on a nonrecurring basis as of December 31, 2022 or 2021. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 41 FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2022 USING CARRYING AMOUNT LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Financial assets Cash and due from banks $ 2,099,062 $ 2,099,062 $ - $ - $ 2,099,062 Interest bearing deposits with banks 32,674,953 32,674,953 - - 32,674,953 Securities available-for-sale Securities held-to-maturity Loans held for sale Loans receivable, net 181,558,037 17,096,010 5,064,385 692,388,888 - - - - Accrued interest receivable 3,784,076 3,784,076 Interest rate lock commitment Cash flow derivative 49,351 2,412,791 - - 181,558,037 500,000 181,558,037 14,634,802 5,064,385 - - 14,634,802 5,064,385 - - - 679,991,000 679,991,000 - 3,784,076 49,351 49,351 2,412,791 - 2,412,791 TOTAL FINANCIAL ASSETS $937,127,553 $ 38,558,091 $203,170,015 $680,540,351 $922,268,457 Financial liabilities Demand deposits Time deposits Federal Home Loan Bank advances 25,000,000 PPP liquidity facility advances 5,826,298 Subordinated debt, net of issuance costs Accrued interest payable Cash flow derivative $603,155,028 $603,155,028 $ - $ - $603,155,028 245,840,048 19,674,794 - - - - 243,030,000 24,789,279 5,826,298 16,843,994 1,265,796 1,265,796 - 33,522 - 33,522 - - - - - - 243,030,000 24,789,279 5,826,298 16,843,994 1,265,796 33,522 TOTAL FINANCIAL LIABILITIES $900,795,486 $604,420,824 $290,523,093 $ - $894,943,917 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 16,847,594 294,237 294,237 - - - - - - 173,280,000 28,840,342 32,055,915 16,847,594 294,237 TOTAL FINANCIAL LIABILITIES $782,696,136 $528,665,111 $251,023,851 $ - $779,688,962 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 2022 2021 $ 172,528,409 $ 137,281,000 $ 2,606,292 $ 2,002,443 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. The Company also offers 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 $323,417 and $311,657 for the years ended December 31, 2022 and 2021, 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: BALANCE AT JANUARY 1, 2021 Unrealized gains net of tax of $364,654 Reclassification for gains on sales net of tax of $1,337 Unrealized loss on cash flow derivative, net of tax of ($155,275) UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR- SALE SECURITIES UNREALIZED GAINS (LOSSES) ON CASH FLOW DERIVATIVES ACCUMULATED OTHER COMPREHEN- SIVE (LOSS) $ 1,394,132 $ (53,478) $ 1,340,654 (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 Unrealized losses net of tax of $5,209,945 Reclassification for gains on sales net of tax of $4,045 (19,526,846) (15,217) - - (19,526,846) (15,217) Unrealized gain on cash flow derivative, net of tax of ($374,758) - 1,409,797 1,409,797 BALANCE AT DECEMBER 31, 2022 $ (19,345,311) $ 1,864,317 $ (17,480,994) 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 2022 Unrealized gains and losses on available-for-sale securities Realized gains on securities available-for-sale $ 19,262 Gain on Sale of Investment Securities Other-than-temporary Impairment - N/A Total before tax Tax effect Net of Tax 2021 19,262 (4,045) $ 15,217 Income Tax Expense 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 5,706 (1,337) $ 4,369 Income Tax Expense 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Related Party Transactions For the years ended December 31, 2022 and 2021, 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 $350 and $0 for the years ended December 31, 2022 and 2021. 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 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY 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 2022 2021 $ 693,228 $ 3,271,498 94,076,862 101,305,082 448,740 315,398 $ 95,218,830 $104,891,978 $ 19,674,794 $ 19,616,869 597,907 1,116,385 74,946,129 84,158,724 $ 95,218,830 $104,891,978 2022 $ - 2021 $ - - 701,943 701,943 - 81,666 81,666 (701,943) (81,666) - - - - 994,859 553,286 (1,696,802) (634,952) 356,328 91,705 Income (loss) before undistributed net income of bank subsidiary (1,340,474) (543,247) Equity in undistributed net income of bank subsidiary NET INCOME 11,904,046 11,271,208 $ 10,563,572 $ 10,727,961 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 45 STATEMENTS OF CASH FLOWS Years Ended December 31 OPERATING ACTIVITIES Net income Equity in undistributed net income of bank subsidiary Adjustments to reconcile net income to net cash provided by Operating Activities Share-Based Compensation Decrease/(increase) in: Intercompany Receivable Income Tax Receivable Other Assets Increase (decrease) in: Intercompany Payable Accrued Interest Payable Other Liabilities 2022 2021 $ 10,563,572 $ 10,727,961 (11,904,046) (11,271,208) 57,925 536,564 6,494 81,807 223,692 (315,398) (356,328) (706) - - (504,924) (1,013,255) (23,335) 9,781 (81,666) (21,462) Net Cash Provided by Operating Activities $ (1,397,805) $ (1,886,727) 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 Repurchase of Common Stock Net cash Provided by Financing Activities Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year 22. Subsequent Events 1,000,000 (16,883,502) $ 1,000,000 $ (16,883,502) - 19,610,375 283,581 198,586 (2,464,046) - $ (2,180,465) 19,808,961 (2,578,270) $ 1,038,732 3,271,498 - $ 693,228 $ 3,271,498 The date to which events occurring after December 31, 2022, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 10, 2023, 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 EXECUTIVE VICE PRESIDENT & HEAD OF DEPOSIT PRODUCTS KEVIN FERRYMAN EXECUTIVE VICE PRESIDENT & HEAD OF SBA DIVISION STEVE WITT SENIOR VICE PRESIDENT & MARKET PRESIDENT PRINCE WILLIAM COUNTY DAVE DOCKENDORFF SENIOR VICE PRESIDENT & MARKET PRESIDENT LOUDOUN COUNTY DARREN TULLY SENIOR VICE PRESIDENT & MARKET PRESIDENT FAIRFAX COUNTY SHAREHOLDER & COMPANY INFORMATION 47 Our IDEAS are Driving Client Success through unique, flexible solutions and exceptional consultative service Throughout 2022, our experienced bankers and innovative technologies have provided customized capital solutions to clients across a broad range of industries and sectors. If you’re looking for an entrepreneurial banking partner that is committed to your growth and success by getting to “yes” quickly, contact Freedom Bank. Here are some of the dynamic organizations we assisted: Historic American Brasserie and Barroom in Old Town Alexandria Devoted to Serving Familiar Comfort Foods $4,072,500 SBA 504 Loan for Purchase and Renovation of Restaurant Building March 2022 Expert Construction Site Hauling, Removal, and Excavation Services $2,750,000 Term Loan to Complete Leveraged Buyout Transaction and Working Capital Line of Credit March 2022 Full-Service Flooring Company Specializing in Corporate and Commercial Installations $2,800,000 Commercial Mortgage and Line of Credit May 2022 Provider of Complete Residential and Commercial HVAC Services $6,100,000 Line of Credit, Debt Refinancing, and Commercial Real Estate Loan for Expansion of Operations May 2022 Commercial & Residential Real Estate Investment & Development Advisory Firm $2,275,250 Commercial Line of Credit for Purchase of Real Estate from the DC Government July 2022 Family-Owned & Operated Cluster of Montessori Centers Across the Northern Virginia Metropolitan Area $1,400,000 Refinancing for Owner-Occupied Real Estate August 2022 San Antonio-Based Roofing & Solar Contractor Providing Roof Replacement & Roof Repair Throughout Texas $1,700,000 SBA 7A Loan to Refinance MCA Loans & Working Capital August 2022 Northern VA-Based Full-Body Group Fitness Company to Inspire you to Become Better, Stronger, and Faster – Every Day $2,900,000 Guidance Line to Help Finance Multiple New Locations October 2022 Mold Remediation & Prevention, 24-Hour Flood Restoration, Final Construction Cleaning, and COVID-19 Disinfection Company in the Washington Metropolitan Area $2,250,000 Term Loan, Lines of Credit and Equipment Financing October 2022 Putting our IDEAS to work when you need us most. Business Banking Personal Banking Mortgage Banking Call 703-242-5300 or visit 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 27, 2023 at 4 pm Shareholders may participate in the meeting by logging into Zoom using the following Meeting ID: 410 003 4459 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 MANASSAS RESTON 4090 Lafayette Center Drive, Suite B Chantilly, VA 20151 10555 Main Street, Suite 100 Fairfax, VA 22030 10611 BaIls Ford Road, Suite 110 Manassas, VA 20109 11700 Plaza America Drive, Suite 110 Reston, VA 22190 571-395-4000 703-667-4167 703-349-2210 703-663-2300 VIENNA MORTGAGE DIVISION SBA DIVISION 502 Maple Avenue West Vienna, VA 22180 4090 Lafayette Center Drive, Suite B Chantilly, VA 20151 500 Mamaroneck Avenue, Suite 400 Harrison, NY 10528 703-667-4170 703-766-6400 914-370-2061 LOUDOUN COUNTY LOCATION COMING SOON freedom.bank OTCQX : FDVA 00DFDDF

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