Freedom Bank of Virginia
Annual Report 2023

Plain-text annual report

2 0 2 3 A N N U A L R E P O R T ENTREPRENEURIAL DNA EXTRAORDINARY SERVICE EASY-TO-USE TECHNOLOGY Business Banking • Personal Banking • Mortgage Banking freedom.bank ABOUT THE BANK Our Vision • Provide compelling ideas, relevant financial products, and exceptional service to our clients in the way they wish to be served • Focus on building lead relationships with businesses, real estate owners, and professionals with sales offices across Northern Virginia and the DC Metropolitan Service Area • Concentrate on industry verticals to deliver unique, sector-specific solutions and have market executives to engage local businesses and communities • Use innovative technology, a network of sales offices, and a team of experienced bankers to make banking functional and convenient for businesses and consumers Our Core Values • Freedom Bank’s innovative approach to banking starts with IDEAS based upon a keen understanding of client needs and market opportunities. > INNOVATION - Exhaust all options and take smart risks > DISCIPLINE - Act with unwavering integrity > EXPERIENCE - Deliver exceptional outcomes > ATTITUDE - Build relationships through teamwork and respect > SERVICE - Participate in our communities and industries • Our IDEAS help define the value we bring to lead client relationships and in the capabilities that we develop on our team or through partnering with best-in-class product providers. FINANCIAL HIGHLIGHTS TOTAL ASSETS ($M) TANGIBLE BOOK VALUE PER SHARE 1 7 . 8 % C A G R o f $877 5 - Y e a r $767 $1,085 $991 $479 $500 9 . 1 % C A G R o f 5 - Y e a r $12.84(1) $2.41 $13.08(1) $2.44 $8.47 $8.86 $10.09 $11.45 $10.43 $10.64 2018Y 2019Y 2020Y 2021Y 2022Y 2023Y 2018Y 2019Y 2020Y 2021Y 2022Y 2023Y Tangible Book Value Per Share AOCI Add Back (1)Excludes Negative AOCI Impact 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 49 SHAREHOLDER & COMPANY INFORMATION 51 SERVING OUR COMMUNITIES A LETTER TO OUR SHAREHOLDERS March 15, 2024 Dear Shareholders: On behalf of our directors and officers, we are pleased to present the 2023 Annual Report for Freedom Financial Holdings, Inc. that highlights our financial performance during the past year. We are proud of our colleagues’ efforts and our culture of IDEAS that enabled us to achieve the milestone of crossing over $1.0 billion in total assets in 2023. We are equally grateful to our clients who have affirmed that our focus on small and mid-sized businesses with our company’s differentiation of an entrepreneurial DNA, extraordinary service and easy-to-use technology is working. Our relationship-driven business model is focused on building long-term trust with our clients. In a year when several high-profile bank failures caused clients around the country to rethink their banking partnerships, we decided to take a very conservative financial posture. Our company has healthy capital ratios with a Common Equity Tier 1 Ratio of 12.65%, abundant liquidity with a loan-to-deposit ratio of 83.6%, and a ratio of uninsured deposits to total deposits of 25.7%, all as of December 31, 2023. This strong balance sheet allowed us to remain open for additional new business and enabled us to grow our loan portfolio by 10.9% in 2023. It should be noted in the current environment where real estate loans are being heavily scrutinized, we have a smaller exposure to commercial real estate (CRE) than most banks our size with total investor CRE loans to total capital of 192% at year-end, which is well below the regulatory guidelines of 300%. Furthermore, our ratio of Allowance for Credit Losses to loans held-for-investment was 1.37% as of December 31, 2023 well above the ratio in the prior year. Your company is safe and sound and we are well-positioned to continue to serve our customers and community. However, as described below, this approach weighed on our profitability in 2023 because of rising deposit costs and a prudent increase in our allowance for credit losses. Net income for the full year 2023, was $2,318,697 or $0.32 per diluted share, compared to $10,563,574 or $1.45 per diluted share for the full year 2022. Pre-provision, pretax income for the full year 2023 was $7,909,845 compared to pre-provision, pretax income of $14,501,162 for the full year 2022. Nevertheless, the tangible book value of the Company’s common stock on December 31, 2023, increased to $10.64 per share compared to $10.43 per share on December 31, 2022. Indeed, excluding AOCI adjustments, the tangible book value of the Company’s common stock on December 31, 2023, was $13.09 per share compared to $12.87 per share on December 31, 2022. Of course, despite the increase in the tangible book value of the company, we are disappointed with the bottom-line earnings results for the year. The higher cost of deposits resulted in net interest margin compression of 86 basis points from 3.63% in 2022 to 2.77% in 2023. Although our investment and loan yields were strong and increased in 2023, the well-publicized increases in the federal funds rate as well as our deposit betas running higher than anticipated caused the cost of deposits to increase at a more rapid pace. The cost of funds increased 220 basis points from 0.89% to 3.09% in 2023 compared to prior year. The Company also recognized a provision for credit losses of $5,737,441 for the full year 2023, much higher than the prior year provision of $1,248,000. This was related to a single, legacy non-accrual relationship where the bank was the victim of an apparent fraud by the borrower. We expect this to be a one-time event, but given current industry trends, we also elected to take a several proactive steps to ensure that we accelerate improvement in asset quality and earnings with non-accrual loan balances expected to decline materially in 2024. The Company is fortunate to operate in the vibrant Washington DC MSA and our strategy to focus on entrepreneurs with our 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 eleven 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 loans held for investment by 10.8%, with commercial and industrial loans representing 23% of portfolio loans as of December 31, 02 A LETTER TO OUR SHAREHOLDERS 2023. We are proud of our loyal clients, and you will find tombstone announcements representing several notable businesses for which we provided new loans in 2023 at the back of this report. Community Banking includes five sales offices across Northern Virginia. We relocated our Chantilly Branch and combined it with our Mortgage Division in 2023 and launched several new deposit products. This led to strong deposit growth of 8.5% in 2023, with non-interest deposit balances now representing 16% of total deposits. 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. SBA Banking has a team of six dedicated SBA professional 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 $18.2 million for the 12 months ended December 31, 2023. The Bank continues to operate as a Small Business Administration Preferred Lender. Mortgage Banking is comprised of 12 mortgage loan officers and a dedicated operations team. We generated residential loan production of $146.4 million in 2023, including $54.7 million of 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. We continue to invest in our team and were excited to appoint Marc Tohir, Executive Vice President and Head of Commercial Banking to help steer and scale our sales efforts. We also welcomed David Sanders, Senior Vice President and Chief Accounting Officer to continue to build our company’s infrastructure for FIDICIA compliance and CECL adoption as we cross over the $1.0 billion total asset threshold. Our group of executives and department managers are talented, and we are working hard to find more strategies that promote the career and professional development of our colleagues. As an extension of our commitment to helping small businesses and promoting more inclusion in the financial system, our Board of Directors continues to support the 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 has now raised over $250,000 for the Fund, which makes loans to entrepreneurs of color in the DC region administered by the Community Business Partnership. We expect that the year ahead in 2024 will bring more stability in the banking industry and certainty on economic conditions. This will enable us to drive higher levels of earnings from net interest and fee-based revenue, preserve our strong liquidity and capital levels, and allow the full potential of our talented team to shine through with improved financial results. 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 grow and 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 Crowe LLP Independent Member Crowe Global Crowe LLP Independent Member Crowe Global Opinion on the Financial Statements Report of Independent Registered Public Accounting Firm Report of Independent Registered Public Accounting Firm 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") as of December 31, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), Stockholders and the Board of Directors of Freedom Financial Holdings, Inc. changes in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2023, Fairfax, Virginia and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2023 and 2022, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2023, in Opinion on the Financial Statements conformity with accounting principles generally accepted in the United States of America. Opinion on the Financial Statements 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 Change in Accounting Principle "Company") as of December 31, 2021, the related consolidated statements of operations, comprehensive "Company") as of December 31, 2021, the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes income, changes in stockholders’ equity, and cash flows for the year then ended, and the related notes As discussed in Note 1 to the financial statements, the Company changed its method for accounting for credit losses (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, effective January 1, 2023, due to the adoption of Financial Accounting Standards Board (FASB) Accounting Standards 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 Codification No. 326, Financial Instruments - Credit Losses (ASC 326). The Company adopted the new credit loss 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 standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be accepted in the United States of America. accepted in the United States of America. reported in accordance with previously applicable generally accepted accounting principles. The adoption of the new credit loss standard and its subsequent application is also communicated as a critical audit matter below. Basis for Opinion Basis for Opinion We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audit, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Basis for Opinion 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 These financial statements are the responsibility of the Company's management. Our responsibility is to express an 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 opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with 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 the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with 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. respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the auditing standards of the PCAOB and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we We conducted our audits in accordance with the standards of the PCAOB and in accordance with auditing standards plan and perform the audit to obtain reasonable assurance about whether the financial statements are free generally accepted in the United States of America. Those standards require that we plan and perform the audit to of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due 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 to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal expressing an opinion on the effectiveness of the Company's internal control over financial reporting. control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control Accordingly, we express no such opinion. over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such Our audits included performing procedures to assess the risks of material misstatement of the financial statements, procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included financial statements. Our audit also included evaluating the accounting principles used and significant examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits estimates made by management, as well as evaluating the overall presentation of the financial statements. also included evaluating the accounting principles used and significant estimates made by management, as well as We believe that our audits provide a reasonable basis for our opinion. evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Other Matter Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Other Matter Critical Audit Matter The financial statements of The Freedom Bank of Virginia for the year ended December 31, 2020, were audited by other auditors, who expressed an unmodified opinion on those statements on March 9, 2021. The critical audit matter communicated below is a matter arising from the current period audit of the financial As disclosed in Note 1 of the financial statements, a reorganization occurred during 2021 from The Freedom statements that was communicated or required to be communicated to the audit committee and that: (1) relates Bank of Virginia to Freedom Financial Holdings, Inc. The financial statements of The Freedom Bank of Virginia for the year ended December 31, 2020, were audited by other auditors, who expressed an unmodified opinion on those statements on March 9, 2021. 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. 04 INDEPENDENT AUDITOR’S REPORT (Continued) (Continued) to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Allowance for Credit Losses On January 1, 2023, the Company adopted ASU 2016-13 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 as described in Notes 1 and 4 of the consolidated financial statements and the explanatory paragraph above. The Company applies the weighted average remaining life methodology to estimate the collective quantified component of the allowance to all portfolio segments, which is referred to as the loss estimation model. Collective calculation methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. If historical loss experience does not exist for the company, peer group historical loss experience is used from peers of a similar size and geographic area. Adjustments to historical loss information are made for changes in the experience, ability, and depth of lending management and other relevant staff, changes in the value of underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit, and changes in the level of such concentrations, changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution's existing portfolio, changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, changes in the quality of the institution's loan review system, changes in the nature and volume of the portfolio and in the terms of loans as well as changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. Auditing the allowance for credit losses was identified by us as a critical audit matter because of the significant auditor judgment applied and significant audit effort required to evaluate the subjective and complex judgments made by management throughout the initial adoption and subsequent application processes, including the loss estimation model and significant judgements related to adjustments to historical loss information. The primary substantive procedures performed to address this critical audit matter include: • Evaluating the reasonableness and appropriateness of the weighted average remaining life methodology including evaluating judgments in estimating expected credit losses in the loss estimation model. • Evaluating judgments made by management on the loss estimation model. • Testing data used in the loss estimation model for completeness and accuracy. • Evaluating the appropriateness and reasonableness of the factors and judgments used in adjustments to historical loss information. • Evaluating the relevance and reliability of the underlying data used to derive adjustments to historical loss information. • Testing the completeness and accuracy of inputs utilized in the calculation of the adjustments to historical loss information for each portfolio segment. • Testing the mathematical accuracy of the adjustments to historical loss information. We have served as the Company's auditor since 2021. Crowe LLP Washington, D.C. March 15, 2024 INDEPENDENT AUDITOR’S REPORT 05 CONSOLIDATED FINANCIAL STATEMENTS CONSOLIDATED BALANCE SHEETS December 31 2023 and 2022 ASSETS Cash and due from financial institutions Interest-bearing deposits with banks Cash and Cash Equivalents Securities available-for-sale Securities held to maturity, Net of Allowance for Credit Losses of $84,434 as of 2023 (fair value 2023 - $17,611,533; 2022 - $14,634,802) Restricted stock investments Loans held for sale Loans receivable Allowance for credit 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 2023 2,442,050 2022 $ 2,099,062 21,806,078 32,674,953 24,248,128 34,774,015 211,263,518 181,558,037 20,114,269 17,096,010 4,769,900 3,889,200 6,663,929 5,064,385 769,743,881 700,003,008 (10,519,335) (7,614,120) 759,224,546 692,388,888 878,957 977,393 3,721,730 3,784,076 7,633,840 6,997,229 26,731,339 26,248,974 1,987,075 1,736,285 17,430,819 16,484,808 1,084,668,050 $990,999,300 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 Borrowings PPP liquidity facility advances Subordinated debt (net of issuance costs) Allowance for Credit losses on off-balance sheet exposures Accrued interest payable Lease liability Other liabilities TOTAL LIABILITIES Commitments and contingent liabilities - See Note 1 and 17 STOCKHOLDERS' EQUITY Preferred stock, $0.01 par value, 5,000,000 shares authorized; 0 shares issued and outstanding, 2023 and 2022 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: 6,582,677 and 6,583,328 shares issued and outstanding at December 31, 2023 and 2022, respectively (includes 88,993 and 72,069 unvested shares, respectively) Non-Voting Common Stock: 673,000 shares issued and outstanding at December 31, 2023 and 2022, respectively Additional paid-in capital Accumulated other comprehensive income (loss), net Retained earnings Total Stockholders’ Equity 2023 2022 $ 143,956,306 $ 187,416,628 519,339,202 409,760,574 4,120,770 5,977,828 253,641,860 245,840,048 921,058,138 848,995,078 50,000,000 25,000,000 270,576 5,826,298 19,752,719 19,674,794 89,029 - 2,842,646 1,265,796 1,925,671 1,862,773 11,501,219 13,060,825 1,007,439,998 $ 915,685,564 - - 64,937 65,113 6,730 6,730 58,320,419 58,241,499 (17,715,015) (17,113,387) 36,550,981 34,113,781 77,228,052 75,313,736 TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $ 1,084,668,050 $ 990,999,300 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 2023 and 2022 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 CREDIT LOSSES Net Interest Income After Provision for Credit 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 2023 $ 44,430,123 2022 $ 32,213,808 9,749,795 602,891 1,738,669 5,521,973 589,783 601,382 56,521,478 38,926,946 29,227,071 102,593 29,329,664 6,512,624 826,392 7,339,016 27,191,814 31,587,930 5,737,441 1,248,000 21,454,373 30,339,930 1,466,761 2,271,630 - - 1,294,905 226,734 - 906,943 3,895,343 997,967 19,262 1,442,681 218,190 68,404 669,095 5,687,229 Officer and employee compensation and benefits 14,322,882 15,160,439 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 746,494 756,758 805,468 1,565,129 1,323,244 473,676 1,190,263 320,197 1,266,050 705,170 363,099 1,062,306 1,212,233 448,904 990,442 355,710 1,673,201 1,209,644 23,177,312 22,773,997 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 2023 2022 2,172,404 13,253,162 (146,293) 2,689,588 $ 2,318,697 $ 10,563,574 EARNINGS PER COMMON SHARE – BASIC $ 0.32 $ 1.45 EARNINGS PER COMMON SHARE – DILUTED $ 0.32 $ 1.45 WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – BASIC WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING – DILUTED 7,292,638 7,285,726 7,320,455 7,307,659 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) Years Ended December 31 2023 and 2022 Net Income Other Comprehensive Income: Unrealized gains/(losses) on securities: Unrealized holdings gain/(loss) arising during the period Reclassification adjustment for losses (gains) included in net income Tax effect Net of Tax Unrealized gains/(losses) on cash flow hedge: Unrealized holdings gain/(loss) Reclassification adjustment for losses (gains) included in net income Tax effect Net of Tax Total Other Comprehensive Loss 2023 2022 $ 2,318,697 $ 10,563,574 211,460 (24,717,529) - (19,262) (47,579) 5,562,335 163,881 (19,174,456) (930,425) 1,784,555 - - 164,916 (374,758) (765,509) 1,409,797 (601,628) (17,764,659) COMPREHENSIVE INCOME (LOSS) $ 1,717,069 $ (7,201,085) 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 2023 and 2022 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, 2022 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 - stock options Stock-based compensation - restricted stock 45,739 49,163 - - 457 492 - - 283,124 (96,442) - 632,514 - 10,563,572 10,563,572 (17,764,659) - - - - - - - - - - - (17,764,659) (2,464,046) 283,581 (95,950) - 632,514 BALANCE, DEC. 31, 2022 7,184,259 $ 71,843 $58,241,499 $ (17,113,387) $34,113,781 $ 75,313,736 Net income Other comprehensive loss - - - - - - Common stock repurchased (56,632) (567) (573,193) Stock options exercised - - - Restricted stock - vested net of shares withheld Stock-based compensation - stock options Stock-based compensation - restricted stock Cumulative Effect Change in Accounting Principle - CECL 39,057 391 (139,191) - - - - - - - 791,304 - - 2,318,697 2,318,697 (601,628) - - - - - - - - - - - - (601,628) (573,760) - (138,800) - 791,304 118,503 118,503 BALANCE, DEC. 31, 2023 7,166,684 $ 71,667 $58,320,419 $ (17,715,015) $36,550,981 $ 77,228,052 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 2023 and 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash from operating activities: Provision for credit losses Depreciation and amortization of premises and equipment Net amortization of available-for-sale securities Deferred income tax benefit Net realized gains on sales of investment securities Net gain on sale of mortgage loans Net gain on sale of SBA guaranteed loans Loans held for sale originated Proceeds from the sale of loans held for sale Proceeds from the sale of SBA loans Stock-based compensation expense Subordinated debt amortization expense Earnings on company-owned life insurance Repayment of operating lease liabilities (Increase) decrease in: Accrued interest receivable Other assets Increase (decrease) in: Accrued interest payable Other liabilities Net Cash Provided by Operating Activities 2023 $ 2,318,697 2022 $ 10,563,574 5,737,441 1,248,000 144,432 (199,263) (473,592) - 165,988 393,975 (180,311) (19,262) (1,466,761) (2,271,630) - (997,967) (83,817,402) (234,849,336) 83,684,620 247,668,382 - 12,255,948 652,504 77,925 (743,011) (187,891) 536,564 57,925 (669,095) 7,491 62,346 (456,522) (1,317,364) (3,327,862) 1,576,850 (3,059,606) 971,559 2,566,970 3,850,767 32,803,549 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 2023 and 2022 CASH FLOWS FROM INVESTING ACTIVITIES 2023 2022 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) and payments (not including PPP), net PPP loan origination PPP loan payments SBA loan origination, net Purchased loans, net of payments Acquisition of premises and equipment Redemption (purchase) of company-owned life insurance Net Cash Used in Investing Activities CASH FLOWS FROM FINANCING ACTIVITIES Increase in deposits, net Advances from Borrowings Repayment of Borrowings $ - $ - 15,742,241 18,545,768 (45,036,999) (53,682,915) 899,607 (4,000,000) (880,700) - 916,864 (567,950) (77,804,749) (116,051,047) - - 5,555,722 26,229,618 - - (45,996) 260,643 (21,504,915) - (4,177) (1,000,000) (105,310,231) (147,118,754) $ 72,063,059 $ 147,301,677 125,000,000 75,000,000 (100,000,000) (79,035,714) Advances from the Payment Protection Plan Liquidity Facility (“PPPLF”) - - Repayment of advances from the PPPLF (5,555,722) (26,229,617) Proceeds from subordinated debt, net of issuance costs Proceeds from stock options Repurchase of common stock Net Cash Provided by Financing Activities - - - 283,581 (573,760) (2,464,046) 90,933,577 114,855,881 Net Increase in Cash and Cash Equivalents (10,525,887) 540,674 Cash and Cash Equivalents, Beginning of Year 34,774,015 34,233,341 CASH AND CASH EQUIVALENTS, END OF YEAR $ 24,248,128 $ 34,774,015 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 2023 and 2022 SUPPLEMENTAL NONCASH DISCLOSURES 2023 2022 Unrealized loss on securities available-for-sale, net $ 211,460 $ (24,736,791) Loans transferred (to)/from held-for-sale from/to portfolio Right-of-use assets obtained in exchange for lease liabilities $ $ - - $ (2,314,677) $ - Unrealized gain/(loss) on cash flow derivative $ (930,425) $ 1,784,555 Unfunded commitment on limited partnership investments $ 4,089,337 $ 3,500,000 SUPPLEMENTAL INFORMATION Cash paid during the year for interest $ 27,877,523 $ 6,367,457 Cash paid during the year for income taxes $ 980,000 $ 2,085.000 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, 2023 AND 2022 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. 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 financial statements and footnotes for prior periods 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 To prepare financial statements in conformity with accounting principles generally accepted in the United States of America management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided, and actual results could differ. 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 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. 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ALLOWANCE FOR CREDIT LOSSES – HELD-TO-MATURITY SECURITIES Management measures expected credit losses on held-to-maturity debt securities on a collective basis by major security type. The estimate for expected credit losses considers historical credit loss information tat is adjusted for current conditions and reasonable and supportable forecasts. Management classifies the held-to-maturity portfolio into the following major security types: corporate notes and municipal securities. ALLOWANCE FOR CREDIT LOSSES – AVAILABLE-FOR-SALE SECURITIES Management determines expected credit losses on available for sale securities to be recognized through a valuation allowance instead of as a direct write-down to the amortized cost basis of the security. An available for sale security is considered impaired if the fair value is less than its amortized cost basis. If any portion of the decline in fair value is related to credit, the amount of allowance is determined as the portion related to credit, limited to the difference between the amortized cost basis and the fair value of the security. If we have the intent to sell, or believe it is more likely than not we will be required to sell an impaired available for sale security before recovery of the amortized cost basis, the credit loss is recorded as a direct write-down of the amortized cost basis. Credit losses on investment securities are recognized through the Provision for credit losses on our income statement. Declines in the fair value of available for sale securities that are not considered credit related are recognized in AOCI in the balance sheet. RESTRICTED STOCK INVESTMENTS Federal Reserve Bank stock, Federal Home Loan Bank (FHLB) stock, Federal Reserve Bank (FRB) 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 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 cost or market 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 credit 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. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15 ALLOWANCE FOR CREDIT LOSSES - LOANS The allowance for credit losses represents an amount which, in management's judgment, reflects the lifetime expected losses that may be sustained on outstanding loans at the balance sheet date based on the evaluation of the size and current risk characteristics of the loan portfolio, past events, current conditions, reasonable and supportable forecasts of future economic conditions and prepayment experience. The allowance is measured and recorded upon the initial recognition of a financial asset. The allowance is reduced by charge-offs, net of recoveries of previous losses, and is increased or decreased by a provision or credit for credit losses, which is recorded as a current period expense. Management estimates the allowance balance using relevant available information, for internal and external sources relating to past events, current events, current conditions and reasonable and supportable forecasts. Historical loss experience provides the basis for the estimation of expected credit losses. If historical loss experience does not exist for the company, peer group historical loss experience is used from peers of a similar size and geographic area. Adjustments to historical loss information are made for changes in the experience, ability, and depth of lending management and other relevant staff, changes in the value of underlying collateral for collateral-dependent loans, the existence and effect of any concentrations of credit, and changes in the level of such concentrations, changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the portfolio, including the condition of various market segments, the effect of other external factors such as competition and legal and regulatory requirements on the level of estimated credit losses in the institution's existing portfolio, changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified or graded loans, changes in the quality of the institution's loan review system, changes in the nature and volume of the portfolio and in the terms of loans as well as changes in lending policies and procedures, including changes in underwriting standards and collection, charge-off, and recovery practices not considered elsewhere in estimating credit losses. The Company’s methodology for estimating the allowance includes a quantified reserve that reflects historical default and loss experience adjusted for expected economic conditions throughout a reasonable and supportable period and in addition to qualitative factors that consider the expected impact of certain factors not fully captured in the quantified reserve, including concentrations of the loan portfolio, expected changes to the economic forecasts, large relationships, early delinquencies, and factors related to credit administration, including, among others, loan-to-value ratios, borrowers’ risk rating and credit score migrations. The allowance for credit losses is measured on a collective (pool) basis when similar risk characteristics exist. The company has identified the following portfolio segments: • Commercial and Industrial • Real estate – commercial • Real estate construction • Real estate – residential • Consumer and other The Company applies the weighted average remaining life methodology to estimate the collective quantified component of the allowance to all portfolio segments. Collective calculation methodologies utilize the Company’s historical default and loss experience adjusted for future economic forecasts. The most significant economic variable included in the reasonable and supportable forecast is the unemployment rate. Loans that do not share risk characteristics are evaluated on an individual basis. Loans evaluated individually are not also included in the collective evaluation. When management determines that foreclosure is probable, expected credit losses are based on the fair value of the collateral at the reporting date adjusted for selling costs as appropriate. 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. 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 $226,734 and $218,190 for the years ended December 31, 2023 and 2022, respectively. 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 credit 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 on December 31, 2023 and 2022. 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 all 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 17 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. 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. 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2023 2022 7,292,638 7,285,726 27,817 21,933 7,320,455 7,307,659 There were no antidilutive options for the year ended December 31, 2023 and 2022. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 19 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. RECENTLY ADOPTED PRONOUNCEMENTS ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, as amended On January 1, 2023, the company adopted ASU 2016-13 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, 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 Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023, are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The Company recorded a net increase to retained earnings of $118,503 as of January 1, 2023 for the cumulative effect of adopting ASC 326. Adoption Date January 1, 2023 AS RECORDED UNDER ASC 326 PRE-ASC 326 ADOPTION IMPACT OF ASC 326 ADOPTION Assets: Held-to-maturity Corporate Notes Municipal Securities Allowance for credit Losses on debt securities Loans Commercial and industrial Real Estate - commercial Real Estate - construction Real Estate - residential Consumer $ 21,120 $ - $ 21,120 84,509 $ 105,629 - - 84,509 $ 105,629 $ 1,376,776 $ 1,423,213 $ (46,437) 3,408,849 1,064,369 533,158 753,336 4,517,637 (1,108,788) 535,005 692,107 446,158 529,364 (158,949) 307,178 Allowance for Credit Losses on Loans $ 7,136,488 $ 7,614,120 $ (477,632) Liabilities: Allowance for credit losses on unfunded commitments $ 219,093 $ - $ 219,093 ASU 2022-02, Financial Instruments—Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures On January 1, 2023, we adopted ASU 2022-02, which eliminates the accounting guidance for TDRs and replaces TDRs with loan modifications to borrowers experiencing financial difficulty. Modifications occur as a result of our loss mitigation activities. A variety of solutions are offered to borrowers, including loan modifications that may result in principal forgiveness, interest rate reductions, term extensions, payment delays, repayment plans. On January 1 2023, we adopted (ASU) 2022-01, Derivatives and Hedging (Topic 815): Fair Value Hedging—Portfolio Layer Method, which addresses issues raised after the FASB issued ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. A major provision of ASU 2017-12 was the addition of the last-of-layer hedging method. For a closed portfolio of fixed-rate prepayable financial assets or one or more beneficial interests secured by a portfolio of prepayable financial instruments, such as mortgages or mortgage-backed securities, the last-of-layer method allows an entity to hedge its exposure to fair value changes due to changes in interest rates for a portion of the portfolio that is not expected to be affected by prepayments, defaults, and other events affecting the timing and amount of cash flows. 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RECENT ACCOUNTING PRONOUNCEMENTS In March 2023, the FASB issued ASU 2023-02, "Investments—Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method". ASU 2023-02 allows reporting entities to elect to account for qualifying tax equity investments using the proportional amortization method, regardless of the program giving rise to the related income tax credits. The amendment in this ASU also remove the specialized guidance for low-income- housing tax credit investments that are not accounted for using the proportional amortization method and instead require that those LIHTC investments be accounted for using the guidance in other GAAP. The amendments are effective for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The adoption of this pronouncement is not expected to have a material impact on the Consolidated Financial Statements. 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 on December 31, 2023 and 2022 was $0. Additionally, the Company is required to pledge cash as collateral for its derivative positions with its counterparty. The required reserve on December 31, 2023 and 2022 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 on December 31, 2023 and 2022 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses: DEC. 31, 2023 Available-for-sale Corporate notes Agency notes Mortgage-backed securities Municipal securities - tax exempt Municipal securities - taxable SBA loan pools Asset-backed securities AMORTIZED COST GROSS UNREALIZED GAINS GROSS UNREALIZED LOSSES FAIR VALUE $ 42,234,907 $ 8,591 $ (5,868,898) $ 36,374,600 1,000,000 - (24,671) 975,329 86,019,318 221,612 (10,221,181) 76,019,749 11,242,484 25,250,785 - (1,017,708) 10,224,776 1,005 (4,209,224) 21,042,566 5,813,205 11,218 (120,235) 5,704,188 12,672,624 118,839 (131,059) 12,660,404 Private-label mortgage-backed securities 18,380,368 10,781 (2,596,245) 15,794,904 Private-label commercial mortgage-backed securities 10,980,367 9,437 (284,146) 10,705,658 Private-label collateralized loan obligations 21,965,107 12,327 (216,090) 21,761,344 Total Available-for-sale $ 235,559,165 $ 393,810 $(24,689,457) $ 211,263,518 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 10,428,125 5,686,144 - $ (476,920) $3,523,080 7,818 (1,091,614) 9,344,329 - (942,020) 4,744,124 Total Held-to-maturity $ 20,114,269 $ 7,818 $ (2,510,554) $ 17,611,533 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 21 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) 6,419,401 (292,766) 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 4,028 (1,412,437) 9,834,374 1,853,227 - (523,839) 1,329,388 Total Held-to-maturity $ 17,096,010 $ 4,028 $ (2,465,236) $ 14,634,802 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 $ 250,000 $ 251,005 $ - $ - 10,938,013 10,116,125 58,925,330 52,888,837 4,654,717 1,686,144 4,135,376 1,204,104 50,065,769 45,487,240 13,773,408 12,272,053 120,179,112 108,743,207 20,114,269 17,611,533 Mortgage-backed securities 115,380,053 102,520,311 - - $ 235,559,165 $211,263,518 $ 20,114,269 $ 17,611,533 Securities pledged to the Federal Home Loan Bank (FHLB) at years ending 2023 and 2022 had a carrying amount of 43,623,462 and $76,304,307, respectively. Securities pledged to the Federal Reserve Bank (FRB) at years ending 2023 and 2022 had a carrying amount of $8,539,099 and $0, respectively. 22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Information pertaining to securities with gross unrealized losses on December 31, 2023, 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 DEC. 31, 2023 Available-for-sale Corporate notes Agency notes $ 86,958 $ 2,475,527 $ 5,781,941 $ 31,890,481 $ 5,868,899 $ 34,366,008 - - 24,671 975,329 24,671 975,329 Mortgage-backed securities 35,142 5,684,868 10,186,039 49,149,965 10,221,181 54,834,833 Municipal securities - tax exempt 8,305 520,091 1,009,403 9,704,685 1,017,708 10,224,776 Municipal securities - taxable - - 4,209,224 20,791,560 4,209,224 20,791,560 SBA loan pools Asset-backed securities Private-label mortgage-backed securities Private-label commercial mortgage-backed securities Private-label collateralized loan obligations 8,873 519,849 111,362 3,663,028 120,235 4,182,877 9,545 1,914,947 121,514 4,353,612 131,059 6,268,559 - - 2,596,245 14,854,381 2,596,245 14,854,381 169,269 4,427,126 114,877 3,313,256 284,146 7,740,382 15,512 1,963,871 200,577 11,730,377 216,089 13,694,248 TOTALS $ 333,604 $17,506,279 $24,355,853 $150,426,674 $ 24,689,457 $167,932,953 GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE GROSS UNRECOGNIZED LOSSES FAIR VALUE Held-to-maturity Corporate notes $ - $ - $ 476,920 $ 3,523,080 $ 476,920 $ 3,523,080 Municipal securities - tax exempt - - 1,091,614 5,174,451 1,091,614 5,174,451 Municipal securities - taxable 459,980 3,540,020 482,040 1,204,104 942,020 4,744,124 $ 459,980 $ 3,540,020 $ 2,050,574 $ 9,901,635 $ 2,510,554 $ 13,441,655 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 23 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 Management evaluates securities for credit losses 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. As of December 31, 2023, 169 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, tax-exempt municipal securities, taxable municipal securities, Small Business Administration (SBA) securities, 41 of the securities are secured by corporate bonds, private-label MBS/CMBS, Asset Based Security (ABS), and 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 2023 2022 $ - $ 2,004,021 - - 20,503 1,241 24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The tax provision related to these net realized gains and losses was $0 and $4,032 for the years ended December 31, 2023 and 2022, 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 2023 2022 $ 2,296,800 $ 2,296,800 2,407,100 1,526,400 66,000 66,000 $ 4,769,900 $ 3,889,200 The following table shows a rollforward of the allowance for credit losses on held to maturity securities for the twelve months ended December 31, 2023: Balance December 31, 2022 Adjustment for adoption of ASC 326 Provision for credit losses Balance December 31, 2023 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 costs/(fees), net Loans receivable Allowance for credit losses Loans, net CORPORATE NOTES MUNICIPAL SECURITIES $ - $ - 21,120 (7,620) 84,509 (13,575) $ 13,500 $ 70,934 2023 2022 $ 177,703,039 $ 159,581,315 389,737,990 382,308,395 29,835,917 42,360,588 145,605,624 85,988,119 26,847,526 30,132,305 769,730,096 700,370,722 13,785 (367,714) 769,743,881 700,003,008 (10,519,335) (7,614,120) $ 759,224,546 $ 692,388,888 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 25 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: This portfolio consists of residential first and second mortgage loans and home equity lines of credit and term loans secured primarily by the residences of borrowers. Residential mortgage loans and home equity lines of credit secured by owner-occupied property generally are made with a loan-to-value ratio of up to 80 percent. Consumer loans: This portfolio consists of solar panel loans, 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 credit 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 2023 Allowance for Credit Losses COMMERCIAL & INDUSTRIAL REAL ESTATE - COMMERCIAL REAL ESTATE - CONSTRUCTION REAL ESTATE - RESIDENTIAL CONSUMER TOTAL Beginning balance $ 1,423,213 $ 4,517,637 $ 535,005 $ 692,107 $ 446,158 $ 7,614,120 Impact of Adopting ACS 326 (46,437) (1,108,788) 529,364 (158,949) 307,178 (477,632) Charge-offs Recoveries Provision (983,951) (628,853) - - - - - - (893,049) (2,505,853) - - 2,208,618 3,080,067 (397,258) 235,466 761,807 5,888,700 Ending Balance $ 2,601,443 $ 5,860,063 $ 667,111 $ 768,624 $ 622,094 $ 10,519,335 Loans Receivable Ending Balance YEAR 2022 Allowance for Loan Losses $177,703,039 $389,737,990 $ 29,835,917 $145,605,624 $ 26,847,526 $769,730,096 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 Loans Receivable Ending Balance $159,581,315 $382,308,395 $ 42,360,588 $ 85,988,119 $ 30,132,305 $700,370,722 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 2023 Commercial and industrial $ - $ 964,112 $ 4,387,152 $ 5,351,264 $172,351,775 $177,703,039 $ 4,387,152 Real estate - commercial 3,327,663 272,701 334,596 - - - - - 5,652,748 8,980,411 380,757,579 389,737,990 5,652,748 - 272,701 29,563,216 29,835,917 - 1,430,032 1,764,628 143,840,996 145,605,624 1,430,032 - - 26,847,526 26,847,526 - $ 3,934,960 $ 964,112 $11,469,932 $16,369,004 $753,361,092 $769,730,096 $11,469,932 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 Real estate - construction Real estate - residential Consumer TOTALS 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 - Consumer TOTALS - - - - 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 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, 2022: 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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 27 The following table presents the amortized cost basis of loans on nonaccrual status and loans past due over 89 days still accruing as of December 31, 2023: YEAR 2023 Commercial and industrial Real estate - commercial Real estate - construction Real estate - residential Consumer TOTALS NONACCRUAL WITH NO ALLOWANCE FOR CREDIT LOSS NONACCRUAL WITH ALLOWANCE FOR CREDIT LOSS LOANS PAST DUE OVER 89 DAYS STILL ACCRUING $ 1,903,692 $ 2,483,460 $ - 525,000 5,127,748 - 1,430,032 - - - - - - - - $ 3,858,724 $ 7,611,208 $ - The following table presents the amortized cost basis of collateral-dependent loans by class of loans as of December 31, 2023: YEAR 2023 Commercial and industrial Real estate - commercial Real estate - construction Real estate - residential Consumer TOTALS REAL ESTATE BUSINESS ASSETS $ - $ 2,483,460 5,127,748 - - - - - - - $ 5,127,748 $ 2,483,460 Cash basis income recognized approximates interest income recognized as of December 31, 2023 and 2022. No additional funds are committed to be advanced in connection with the impaired loans. CREDIT QUALITY INDICATORS One of the most significant factors in assessing the Company’s loan portfolio is the risk rating. The Company uses the following risk ratings to manage the credit quality of its loan portfolio: pass, special mention, substandard, doubtful and loss. Special mention loans are those loans that have potential weakness that deserves management’s close attention. These loans have potential weaknesses that may result in deterioration of the repayment prospects for the loan or the Company’s credit position at some future date. Substandard loans are inadequately protected by current sound worth, paying capacity of the borrower, or pledged collateral. Doubtful loans have all the inherent weaknesses in the substandard classification and collection or liquidation in full is highly questionable. Loss loans are considered uncollectible and of such little value that continuance as an active asset is not warranted. All other loans not rated are considered to have a pass rating. 28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS An analysis of the credit quality indicators is as follows at December 31: YEAR 2023 PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL Commercial and industrial $147,933,646 $ 9,819,953 $18,052,513 $1,896,927 $ - $177,703,039 Real estate - commercial 361,557,312 17,084,776 5,968,154 5,127,748 Real estate - construction 27,975,781 1,860,136 - Real estate - residential 144,175,592 26,847,526 - - 1,430,032 - - - - - - - - 389,737,990 29,835,917 145,605,624 26,847,526 $708,489,857 $28,764,865 $25,450,699 $7,024,675 $ - $769,730,096 PASS SPECIAL MENTION SUBSTANDARD DOUBTFUL LOSS TOTAL Consumer TOTALS YEAR 2022 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 Real estate - residential Consumer TOTALS 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 Term Loan Amortized Cost Basis by Origination Year: AS OF DECEMBER 2023 Commercial and industrial Risk Rating Pass Special Mention Substandard Doubtful Loss TOTALS 2023 2022 2021 PRIOR TOTAL $62,902,476 $38,971,700 $11,253,007 $34,806,463 $147,933,646 - - - - 2,698,365 4,607,254 2,514,334 9,819,953 1,409,997 4,662,660 11,979,856 18,052,513 1,896,927 - - - - - 1,896,927 - $62,902,476 $44,976,989 $20,522,921 $49,300,653 $177,703,039 Current Period gross write offs $ - $ - $ - $ 983,951 $ 983,951 AS OF DECEMBER 2023 Real Estate - commercial Risk Rating Pass Special Mention Substandard Doubtful Loss TOTALS 2023 2022 2021 PRIOR TOTAL $ 23,746,053 $ 57,000,675 $ 78,138,200 $202,672,384 $361,557,312 - - - - 5,417,198 473,494 11,194,084 17,084,776 2,332,490 360,880 3,274,784 5,968,154 - - - - 5,127,748 5,127,748 - - $ 23,746,053 $ 64,750,363 $ 78,972,574 $222,269,000 $389,737,990 Current Period gross write offs $ - $ - $ - $ 628,853 $ 628,853 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 29 AS OF DECEMBER 2023 Real Estate - construction Risk Rating Pass Special Mention Substandard Doubtful Loss TOTALS 2023 2022 2021 PRIOR TOTAL $ 1,335,851 $ 6,844,611 $ 17,760,383 $ 2,034,936 $ 27,975,781 - - - - 1,860,136 - - - - - - - - - - - 1,860,136 - - - $ 1,335,851 $ 8,704,747 $ 17,760,383 $ 2,034,936 $ 29,835,917 Current Period gross write offs $ - $ - $ - $ - $ - AS OF DECEMBER 2023 Real Estate - residential Risk Rating Pass Special Mention Substandard Doubtful Loss TOTALS 2023 2022 2021 PRIOR TOTAL $ 63,654,602 $ 39,455,300 $ 12,324,800 $ 28,740,891 $144,175,593 - - 1,302,801 127,231 - - - - - - - - - - - - - 1,430,032 - - $ 64,957,403 $ 39,582,531 $ 12,324,800 $ 28,740,891 $145,605,625 Current Period gross write offs $ - $ - $ - $ - $ - AS OF DECEMBER 2023 2023 2022 2021 PRIOR TOTAL Consumer Risk Rating Pass Special Mention Substandard Doubtful Loss TOTALS $ 952,759 $ 360,215 $ 18,568,047 $ 6,966,505 $ 26,847,526 - - - - - - - - - - - - - - - - - - - - $ 952,759 $ 360,215 $ 18,568,047 $ 6,966,505 $ 26,847,526 Current Period gross write offs $ - $ - $ - $ 893,049 $ 893,049 30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Occasionally, the Company modifies loans to borrowers in financial distress by providing principal forgiveness or term extension. When principal forgiveness is provided, the amount of forgiveness is charged-off against the allowance for credit losses. As of December 31, 2023 and 2022, the Company did not modify loans in this manner. 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, 2023, and 2022 there were 21 and 178 PPP loans with an outstanding balance of $0.26 million and $5.83 million, respectively. These loans have $8,265 and $158,966 in remaining net unearned fees for the years then ended. These loans are included with commercial and industrial loans and have no allowance for credit 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 $8,822,736 and $6,717,583 on December 31, 2023 and 2022, respectively. New loans made to such related parties amounted to $2,966,415, and repayments amounted to $196,218 in 2023. Loans paid off during the year ended December 31, 2023 were $676,338 which had an outstanding balance as of December 31, 2022. 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 2023 2022 $ 1,533,495 $ 1,522,155 1,502,983 1,468,327 181,211 181,211 3,217,689 3,171,693 (2,338,732) (2,194,300) NET BANK PREMISES AND EQUIPMENT $ 878,957 $ 977,393 Depreciation and amortization of Company premises and equipment charged to expense amounted to $144,432 and $165,988 in 2023 and 2022, respectively. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 31 6. Other Assets Other Assets include the following as of December 31: Investment in limited partnership - Small Business Investment Company 2023 $ 5,116,803 2022 $ 3,495,674 Investment in limited partnership - Low Income Housing Investment Fund 3,906,469 4,341,562 Accounts receivable Interest rate lock commitment Prepaid expenses Fair value of derivative instruments Other assets TOTAL 623,055 87,551 1,394,342 799,470 49,351 967,851 5,238,826 6,065,011 1,063,773 765,889 $17,430,819 $ 16,484,808 The Company has committed $5.0 million to three separate investments in a Small Business Investment Company. The Company has elected to account for these investments under the equity method; therefore, the change in equity 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. As of December 31, 2023, the outstanding commitment was $2,606,827. During the years ended December 31, 2023 and December 31, 2022, the Company had received and paid capital calls of $1,265,649 and $393,503 respectively. The Company committed $5.0 million to a Low Income Housing Tax Credit (“LIHTC”) investments. The partnerships were 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 these limited partnerships 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 which was $1,482,510 as of December 31, 2023. During the years ended December 31, 2023 and December 31, 2022, the Company had received and paid capital calls of $1,070,547 and $1,216,675, respectively. 7. Deposits The following are time deposits maturing in years ending December 31: 2024 2025 2026 2027 2028 THEREAFTER TOTAL $ 93,068,701 68,228,847 25,110,932 7,627,805 56,734,338 2,871,237 $ 253,641,860 Time deposits in denominations that meet or exceed the FDIC minimum limit of $250,000 or more totaled $45,804,515 and $46,752,857 as of December 31, 2023 and 2022, respectively. The Company held related party deposits of $10,370,982 and $13,520,936 as of December 31, 2023 and 2022, respectively. 8. Borrowings and Advances The Company’s borrowings from the Federal Home Loan Bank of Atlanta (FHLB) were $35.0 million and $25.0 million on December 31, 2023 and 2022, respectively. On December 31, 2023 and 2022, the weighted average rates on FHLB advances were 4.87% and 3.01%, 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 $116.7 million and $147.6 million, respectively. 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FHLB advances are subject to prepayment penalties. During the year ended December 31, 2023 and 2022, 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 in callable FHLB advances for both December 31, 2023 and 2022. The Company’s borrowings from the Federal Reserve Board (FRB) were $15.0 million and $0 million as of December 31, 2023 and 2022, respectively. On December 31, 2023, the weighted average rates on FRB advances were 4.88%. These advances were secured by a blanket collateral agreement with the FRB pledging the Company’s portfolio of residential first mortgage loans with a collateral value of $52.1 million. Advances from the FHLB and FRB are summarized by year of maturity and weighted average interest rate at December 31, 2023: 2024 2025 2026 2027 2028 THEREAFTER TOTAL AMOUNT WEIGHTED AVERAGE RATE $ 30,000,000 - 20,000,000 - - - $ 50,000,000 5.23% N/A 4.33% N/A N/A N/A 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 $0.27 million and $5.83 million on December 31, 2023 and 2022, respectively. The weighted average rate on PPPLF advances was 0.35% as of December 31, 2023 and 2022. 9. Subordinated Notes On November 8, 2021, the Company completed the issuance of $20.0 million in aggregate principal amount of fixed-to- floating rate subordinated notes in a private placement transaction to various accredited investors. The net proceeds of the offering are intended to support growth and be used for other general business purposes. The notes have a maturity date of December 1, 2031 and have an annual fixed interest rate of 3.50% until December 1, 2026. Thereafter, the notes will have a floating interest rate indexed to the Secured Overnight Financing Rate (“SOFR”) (computed on the basis of a 360-day year of twelve 30-day months) from and including December 1, 2026 to the maturity date or any early redemption date. Interest will be paid semi-annually, in arrears, on June 1 and December 1 of each year during the time that the notes remain outstanding through the fixed interest rate period or earlier redemption date. Interest is to be paid quarterly, on March 1, June 1, September 1, and December 1 of each year, during the time in which the interest rate is floating. The balance of subordinated notes, net of issuance costs, is categorized as Subordinated Debt on the balance sheet and was $19,752,719 and $19,674,794 for on December 31, 2023 and 2022. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 33 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 11. Income Taxes Year-end deferred tax assets and liabilities were due to the following: Deferred Tax Assets Allowance for credit 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 Unearned loan fees and costs, net Unrealized gains on cash flow hedges Right-of-use asset Interest rate lock Other NET DEFERRED TAX ASSET 2023 2022 $ 2,606,827 $ 2,369,779 1,482,510 2,553,057 1,791,997 2,023,945 1,404,609 82,546 375,134 100,619 3,789,983 3,685,744 342,747 1,952,547 $ 11,501,219 $ 13,060,825 2023 2022 $ 2,331,454 $ 1,694,062 - 247,239 - 46,633 317,100 - 5,466,521 5,514,100 126,400 426,796 21,866 79,349 391,182 6,605 8,620,276 8,049,031 147,991 177,022 4,887 323,452 440,406 19,404 50,296 - 499,646 363,586 10,037 1,511 986,436 1,051,802 $ 7,633,840 $ 6,997,229 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Income tax expense was the following as of December 31: Current tax expense Federal State Deferred tax expense (benefit) Federal State 2023 2022 $ 275,373 $ 2,691,951 51,926 177,948 (440,136) (162,056) (33,456) (18,255) $ (146,293) $ 2,689,588 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 2023 $456,204 2022 $ 2,783,163 14,591 (40,607) (190,458) - (17,204) (117,038) (251,781) 126,157 (100,299) (140,510) (31,017) (111,036) (100,272) 263,402 $(146,293) $ 2,689,588 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 2023 $ - 2022 $ 36,036 - - - - - - - - - (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, 2019. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 35 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. As of December 31, 2023, 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, 2023 and 2022 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, 2023 Total capital (to risk-weighted assets) Freedom Financial Holdings, Inc. $124,262,404 13.83% $ 94,370,288 10.50% N/A N/A The Freedom Bank of Virginia $124,215,634 13.82% $ 94,370,288 10.50% $ 89,876,465 10.00% Tier 1 capital (to risk-weighted assets) Freedom Financial Holdings, Inc. $ 94,943,069 10.56% $ 76,394,995 8.50% N/A N/A The Freedom Bank of Virginia $113,696,299 12.65% $ 76,394,995 8.50% $ 71,901,172 8.00% Common Equity Tier 1 (to risk-weighted assets) Freedom Financial Holdings, Inc. $ 94,943,069 10.56% $ 62,913,526 7.00% N/A N/A The Freedom Bank of Virginia $113,696,299 12.65% $ 62,913,526 7.00% $ 58,419,702 6.50% Tier 1 capital (to adjusted average assets) Freedom Financial Holdings, Inc. $ 94,943,069 8.56% $ 44,342,383 4.00% N/A N/A The Freedom Bank of Virginia $113,696,299 10.26% $ 44,329,221 4.00% $ 55,411,526 5.00% 36 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, 2022 Total capital (to risk-weighted assets) Freedom Financial Holdings, Inc. $118,841,244 14.27% $ 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 Financial Holdings, Inc. $ 92,427,124 11.10% $ 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 Financial 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 Financial 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% 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, 2023, $23,610,228 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 as of December 31, 2023 and 2022, 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. Fair Value Hedges: Interest rate swaps with notional amounts totaling $30 million and $0 million as of December 31, 2023 and 2022, were designated as fair value portfolio layer hedges of certain fixed rate loans. The hedges were determined 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, 2023 and 2022 were $24,417,499 and $25,189,189, 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, 2023. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 37 LINE ITEM IN THE BALANCE SHEET IN WHICH THE HEDGED ITEM IS INCLUDED CARRYING AMOUNT OF THE HEDGED ASSETS/ (LIABILITIES) CUMULATIVE AMOUNT OF FAIR VALUE HEDGING ADJUSTMENT INCLUDED IN THE CARRYING AMOUNT OF THE HEDGED ASSET/(LIABILITY) 2023 2022 2023 2022 Loans Receivable(a) Brokered Deposits $ 30,000,000 $ - $ - $ - $ (40,000,000) $ (40,000,000) $ - $ - Brokered Time Deposits $ (10,000,000) $ (10,000,000) $ - $ - (a) These amounts represent the amortized cost basis of closed portfolios used to designate hedging relationships in which the hedged item is the stated amount of assets in the closed portfolios anticipated to be outstanding for the designated hedge period. At December 2023, the amortized cost basis of the closed portfolios used in these hedging relationships was $58,582,606. Interest income from the fair value hedge was netted against interest expense thus reducing interest expense by $79,933 and $0 for the years 2023 and 2022 respectively. 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: For the years ended December 31, 2023 and 2022 there was no gain or loss recognized in income on cash flow hedging relationships. 14. Stock Option & Equity Plan In 2007, the Company established the 2007 stock option and equity plan (the Plan) for executives, other employees, officers, directors and consultants. Shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. Shares issued under the Plan may be granted at not less than 100 percent of the fair market value at the grant date. The authorized and granted options under the Plan are as follows at December 31, 2023: 2007 Plan 1,075,280 961,296 341,866 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. As of December 31, 2023 and 2022, there was no remaining amortization expense to be recognized on outstanding stock options. There were no options exercised in 2023. The intrinsic value of options exercised during 2022 was $382,835. The weighted average remaining contractual life of options outstanding was 1.64 and 2.64 years for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023 all outstanding options are fully vested. The intrinsic value of these fully vested options on December 31, 2023 was $68,809. Included in other assets: Derivatives designated as hedges: 2023 2022 The following summarizes the option activity under the Plan: NOTIONAL AMOUNT FAIR VALUE NOTIONAL AMOUNT FAIR VALUE BALANCE AT JANUARY 1, 2022 Interest rate swaps related to loans receivable $30,000,000 $ 11,278 $ - $ - Interest rate swaps related to brokered deposits $40,000,000 $ 888,868 $40,000,000 $ 1,486,587 Interest rate swaps related to brokered time deposits $10,000,000 $ 548,697 $10,000,000 $ 892,680 $80,000,000 $1,448,843 $50,000,000 $ 2,379,267 BALANCE AT DECEMBER 31, 2022 32,446 $ 8.30 The effect of cash flow hedge accounting on accumulated other comprehensive income, net of taxes, for the years ended December 31 are as follows, net of taxes: 2023 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 $ 1,114,112 N/A 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 $ - 38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Grants Exercised Expired Forfeited Grants Exercised Expired Forfeited NUMBER OF SHARES WEIGHTED AVERAGE EXERCISE PRICE 78,185 $ 7.07 (45,739) 6.20 - - - - - - - - - - - - - - BALANCE AT DECEMBER 31, 2023 32,446 $ 8.30 There were no stock options granted during the years ended December 31, 2023 and 2022. 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. For the years ended December 31, 2023 and 2022 there was no gain or loss recognized in income on cash flow hedging relationships. 14. Stock Option & Equity Plan In 2007, the Company established the 2007 stock option and equity plan (the Plan) for executives, other employees, officers, directors and consultants. Shares have been reserved for issuance by the Company upon the grant of stock options or restricted stock awards. Shares issued under the Plan may be granted at not less than 100 percent of the fair market value at the grant date. The authorized and granted options under the Plan are as follows at December 31, 2023: 2007 Plan 1,075,280 961,296 341,866 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. As of December 31, 2023 and 2022, there was no remaining amortization expense to be recognized on outstanding stock options. There were no options exercised in 2023. The intrinsic value of options exercised during 2022 was $382,835. The weighted average remaining contractual life of options outstanding was 1.64 and 2.64 years for the years ended December 31, 2023 and 2022, respectively. As of December 31, 2023 all outstanding options are fully vested. The intrinsic value of these fully vested options on December 31, 2023 was $68,809. The following summarizes the option activity under the Plan: BALANCE AT JANUARY 1, 2022 Grants Exercised Expired Forfeited NUMBER OF SHARES 78,185 - (45,739) - - WEIGHTED AVERAGE EXERCISE PRICE $ 7.07 - 6.20 - - BALANCE AT DECEMBER 31, 2022 32,446 $ 8.30 Grants Exercised Expired Forfeited - - - - - - - - BALANCE AT DECEMBER 31, 2023 32,446 $ 8.30 There were no stock options granted during the years ended December 31, 2023 and 2022. 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. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 39 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 $ 1,114,112 $ - Interest rate contracts $ 1,879,621 AMOUNT OF GAIN RECOGNIZED IN OCI ON DERIVATIVE LOCATION OF GAIN (LOSS) RECLASSIFIED FROM OCI INTO INCOME N/A AMOUNT OF GAIN (LOSS) RECLASSIFIED FROM OCI INTO INCOME $ - 2023 N/A 2022 During the year ended December 31, 2023, 71,352 voting common shares of restricted stock were granted to Company employees as part of a time-based restricted stock agreement with a weighted fair value of $14.67 at the date of grant. These restricted shares cliff vest over a three year period based on their date of grant. At December 31, 2023, there was $665,940 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, 2022, there was $490,331 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, 2022 Grants Vested Expired Forfeited BALANCE AT DECEMBER 31, 2022 Grants Vested Expired Forfeited BALANCE AT DECEMBER 31, 2023 NUMBER OF SHARES WEIGHTED AVERAGE FAIR VALUE 86,788 42,100 (55,819) 10.85 13.97 11.20 - - (1,000) 72,069 71,352 (48,760) 14.03 12.36 14.67 12.79 - - (5,668) 88,993 14.07 $13.86 For the years ended December 31, 2023 and 2022, the Company recognized $791,304 and $632,514 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: BALANCE SHEET CLASSIFICATION DEC. 31, 2023 DEC. 31, 2022 Right-of-use assets: Operating leases Right-of-use asset $ 1,987,075 $ 1,736,285 Lease liabilities: Operating leases Lease liability $ 1,925,672 $ 1,862,773 40 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, 2023 DECEMBER 31, 2022 $ 712,873 $ 1,024,653 Future undiscounted lease payments for operating leases with initial terms of one year or more as of December 31, 2023 are as follows: 2024 2025 2026 2027 2028 THEREAFTER Total undiscounted lease payments Less: imputed interest Net lease liabilities OPERATING LEASE $ 440,851 411,511 223,409 229,364 211,101 672,954 2,189,190 263,518 $ 1,925,672 Supplemental Lease Information Operating lease weighted average remaining lease term (years) Operating lease weighted average discount rate 5.85 1.15% 3.68 2.18% DECEMBER 31, 2023 DECEMBER 31, 2022 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 fair value measurement level of the asset or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The following describes the valuation techniques used by the Company to measure certain financial assets and liabilities recorded at fair value on a recurring basis in the financial statements: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 41 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 2023 Available-for-sale securities $211,263,518 $ - $210,763,518 $ 500,000 Interest rate lock commitment Cash flow derivatives Fair value derivatives Servicing rights asset 2022 87,551 1,437,565 11,278 196,317 - - - - - 87,551 1,437,565 11,278 196,317 - - - $212,996,229 $ - $212,408,678 $ 587,551 Available-for-sale securities $181,558,037 $ - $181,058,037 $ 500,000 Interest rate lock commitment Cash flow derivatives Servicing rights asset 49,351 2,379,267 255,813 - - - - 49,351 2,379,267 255,813 - - $184,242,468 $ - $183,693,117 $ 549,351 42 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table represents recurring level III assets: BALANCE AT JANUARY 1, 2022 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, 2022 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 $ - $ 183,807 - - - 500,000 - - (134,456) - - - - - $ 500,000 $ 49,351 - - - - - - 38,200 - - - - - BALANCE AT DECEMBER 31, 2023 $ 500,000 $ 87,551 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: INDIVIDUALLY EVALUATED LOANS: The fair value of impaired loans with specific allocations of the allowance for credit 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. Assets that were measured at fair value on a nonrecurring basis are summarized below: QUOTED PRICES IN ACTIVE MARKETS FOR IDENTICAL ASSETS (LEVEL 1) SIGNIFICANT OTHER OBSERVABLE INPUTS (LEVEL 2) SIGNIFICANT UNOBSERVABLE INPUTS (LEVEL 3) FAIR VALUE 2023 Individually evaluated loans Commercial and industrial Real estate - commercial $ 1,525,525 $ 2,500,000 - - - - $ 1,525,525 $ 2,500,000 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43 The following table presents quantitative information about level 3 fair value measurements for assets measured at fair value on a non-recurring basis as of December 31, 2023: LEVEL 3 INSTRUMENTS ONLY FAIR VALUE VALUATION TECHNIQUES INPUTS Loans - Commercial and Industrial $ 1,525,525 Market Approach Loans - Real estate - Commercial $ 2,500,000 Consensus asset sale Adjustment for differences between comparable sales Adjustment for differences between comparable estate sales RANGE (WEIGHTED- AVERAGE) 10%-50% (25%) 6%-10% (8%) FASB ASC 825, Financial Instruments, requires disclosure about fair value of financial instruments, including those financial assets and financial liabilities that are not required to be measured and reported at fair value on a recurring or nonrecurring basis. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented may not necessarily represent the underlying fair value of the Company. Additionally, in accordance with ASU 2016-01, which the Bank adopted on January 1, 2018 on a prospective basis, the Company uses the exit price notion, rather than the entry price notion, in calculating the fair values of financial instruments not measured at fair value on a recurring basis. FAIR VALUE MEASUREMENTS AT DECEMBER 31, 2023 USING CARRYING AMOUNT LEVEL 1 LEVEL 2 LEVEL 3 TOTAL Financial assets Cash and due from banks $ 2,442,050 $ 2,442,050 $ - $ - $ 2,442,050 Interest bearing deposits with banks 21,806,078 21,806,078 - - 21,806,078 Securities available-for-sale Securities held-to-maturity Loans held for sale Loans receivable, net 211,263,518 20,114,269 6,663,929 759,224,546 - - - - Accrued interest receivable 3,721,730 3,721,730 Interest rate lock commitment Cash flow derivative Fair value derivative 87,551 11,278 1,437,565 - - - 210,763,518 500,000 211,263,518 17,611,533 6,751,480 - - 17,611,533 6,751,480 - - - 11,278 1,437,565 757,572,000 757,572,000 - 3,721,730 87,551 - - 87,551 11,278 1,437,565 TOTAL FINANCIAL ASSETS $1,026,772,514 $27,969,858 $236,575,374 $758,159,551 $1,022,704,783 Financial liabilities Demand deposits Time deposits Borrowings PPP liquidity facility advances Subordinated debt, net of issuance costs Accrued interest payable $667,416,278 $667,416,278 $ - $ - $667,416,278 253,641,860 50,000,000 270,576 19,752,719 - - - - 256,759,000 49,753,172 270,576 16,231,007 2,842,646 2,842,646 - - - - - - 256,759,000 49,753,172 270,576 16,231,007 2,842,646 TOTAL FINANCIAL LIABILITIES $993,924,079 $670,258,924 $323,013,755 $ - $993,272,679 44 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 - - 181,058,037 500,000 181,558,037 14,634,802 5,113,736 - - 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 $203,219,366 $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 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 2023 2022 $ 139,340,178 $ 172,528,409 $ 4,796,487 $ 2,606,292 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 45 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 $306,755 and $323,417 for the years ended December 31, 2023 and 2022, respectively. The Company has deferred compensation plans for its directors, and its executives. Under the directors’ plan, a director may elect to defer all or a portion of any director-related fees, including fees for serving on board committees. Under the executives’ plan, certain employees may defer all or a portion of their compensation, including any bonus compensation. 19. Accumulated Other Comprehensive Loss The following table presents the changes in accumulated other comprehensive loss, by category, net of tax, for the periods indicated: UNREALIZED GAINS (LOSSES) ON AVAILABLE-FOR- SALE SECURITIES UNREALIZED GAINS (LOSSES) ON CASH FLOW DERIVATIVES ACCUMULATED OTHER COMPREHEN- SIVE (LOSS) BALANCE AT JANUARY 1, 2022 Unrealized gains net of tax of 5,562,335 Reclassification for gains on sales net of tax of $4,045 $181,450 $469,822 $651,272 (19,159,239) (15,217) - - (19,159,239) (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 $ (18,993,006) $ 1,879,619 $ (17,113,387) Unrealized losses net of tax of ($47,579) Reclassification for gains on sales net of tax Unrealized gain on cash flow derivative, net of tax of ($176,194) 163,881 - - - - 163,881 - (765,509) (765,509) BALANCE AT DECEMBER 31, 2023 $ (18,829,125) $ 1,114,110 $ (17,715,015) 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 2023 Unrealized gains and losses on available-for-sale securities Realized gains on securities available-for-sale Credit loss expense Total before tax Tax effect Net of Tax 2022 - - - - $ - Gain on Sale of Investment Securities N/A Income Tax Expense 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 19,262 (4,045) $ 15,217 Income Tax Expense 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. Related Party Transactions For the years ended December 31, 2023 and 2022, the Company used a brokerage firm, at which one of the Company’s directors is a principal. This brokerage firm offers benefits such as payroll services and health and dental insurance for employees of the Company. The brokerage firm receives commission payments directly from the benefit providers. Company- paid fees amounted to $0 and $350 for the years ended December 31, 2023 and 2022. 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 Liabilities 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 Income (loss) before undistributed net income of bank subsidiary Equity in undistributed net income of bank subsidiary NET INCOME 2023 2022 $ 65,035 $ 693,228 96,177,602 94,076,862 878,409 448,740 $ 97,121,046 $ 95,218,830 $ 19,752,719 $ 19,674,794 140,273 597,907 77,228,054 74,946,129 $ 97,121,046 $ 95,218,830 2023 $ - 2022 $ - - 777,925 777,925 - 701,943 701,943 (777,925) (701,943) - - - - 1,117,721 994,859 (1,895,646) (1,696,802) 398,086 356,328 (1,497,560) (1,340,474) 3,816,256 11,904,046 $ 2,318,696 $ 10,563,572 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 47 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 2023 2022 $ 2,318,696 $ 10,563,572 (3,816,256) (11,904,046) 77,925 791,304 57,925 536,564 - 223,692 (398,086) (356,328) (31,581) (706) (483,586) (504,924) - 25,951 (23,335) 9,781 Net Cash Provided by Operating Activities $ (1,515,633) $ (1,397,805) 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 1,600,000 1,000,000 $ 1,600,000 $ 1,000,000 - - - 283,581 (712,560) (2,464,046) $ (712,560) $ (2,180,465) (628,193) (2,578,270) 693,228 3,271,498 $ 65,035 $ 693,228 The date to which events occurring after December 31, 2023, the date of the most recent balance sheet, have been evaluated for possible adjustments to the financial statements or disclosure is March 15, 2024, which is the date on which the financial statements were available to be issued. 48 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 DAVID J. HONOLD DIRECTOR BRANDON C. PARK DIRECTOR MAURY PEIPERL DIRECTOR JOSEPH J. THOMAS PRESIDENT & CEO DIRECTOR 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 MARC TOHIR EXECUTIVE VICE PRESIDENT & HEAD OF COMMERCIAL BANKING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 49 SHAREHOLDER & COMPANY INFORMATION SENIOR LEADERSHIP JAMIE ADKINS HEAD OF MORTGAGE OPERATIONS DAVE DOCKENDORFF LOUDOUN MARKET PRESIDENT DORIS HAMBRIGHT HR DIRECTOR KATHLEEN JOHNSON CHIEF MARKETING OFFICER JENNY JOUDEH HEAD OF DEPOSIT OPERATIONS ERIN MOORE HEAD OF LOAN OPERATIONS THYDA PRICE COMPLIANCE DIRECTOR DAVID SANDERS CHIEF ACCOUNTING OFFICER FLORANTE SANTOS CHIEF TECHNOLOGY OFFICER GABRIELLE SENG BRANCH BANKING MANAGER RAZ SOFY CONTROLLER DARREN TULLY FAIRFAX MARKET PRESIDENT STEVE WITT PRINCE WILLIAM MARKET PRESIDENT 50 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SERVING OUR COMMUNITIES The Freedom Bank Foundation's mission is to support and foster relationships with non-profit organizations that promote financial inclusion and make the communities Freedom Bank serves more vibrant and more equitable. The Foundation has engaged with the Community Business Partnership (CBP) to administer the NOVA Freedom Fund, which provides financing and technical assistance to minorities and entrepreneurs of color. The Fund has already made a meaningful difference for local business owners and through continued support, we look forward to helping many more in our area. To date, the Foundation has raised over $250,000 for the NOVA Freedom Fund and supported seven companies. We are focused on expanding the number of businesses in the portfolio, and currently have a pipeline of over 100 companies. The Freedom Bank Foundation receives donations from the Bank and its employees, as well as coordinates its annual Campaign Celebration to leverage the platform to promote economic inclusion in the local community. Freedom Bank, through the Foundation and in line with the Bank's commitment to diversity and inclusion initiatives, is making an effort to level the playing field to achieve greater equality. Freedom Bank Board Chairman, H. Jason Gold, presenting at the 2023 Freedom Bank Gala SHAREHOLDER & COMPANY INFORMATION 51 Our IDEAS Make the Difference Lots of banks say they’re different. We actually are! Business owners tell us they demand creative and flexible banking solutions. Freedom Bank was built from the ground up to serve the needs of entrepreneurs. Below are some of the dynamic organizations we assisted this year. 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. $1,250,000 For Commercial Mortgage Refinance & Short-Term Working Capital $4,000,000 For Bond Financing for Large Mixed-Use Redevelopment Project $5,745,000 For Property Acquisition and Facility Construction & Buildout $1,330,000 For Bridge Loan to Acquire Land & Stream Restoration Easement $2,000,000 Term Loan for Business Acquisition $25,000,000 Term Loan to Refinance Main Street Lending Program Loan Facility Woodstock Cabinetry $990,000 SBA 7A Loan to Purchase Owner Occupied Real Estate & Equipment $4,000,000 Multi-Year Revolver Loan for Location Expansion $712,500 Working Capital Line of Credit for Clear Sky Holdings, LLC Putting our IDEAS to work when you need us most. Business Banking • Personal Banking • Mortgage Banking Call 703-242-5300 or visit freedom.bank/ideas. CORPORATE HEADQUARTERS Freedom Financial Holdings, Inc. 10555 Main Street Fairfax, VA 22030 703-242-5300 TRANSFER AGENT Equiniti Trust Company, LLC (“EQ”) 55 Challenger Road, Floor 2 Ridgefield Park, NJ 07660 800-937-5449 www.equiniti.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 25, 2024 at 4 pm Shareholders may participate in the meeting by logging into Zoom using the following Meeting ID: 410 003 4459 and Passcode: 10555. Shareholders will have the ability to ask questions during the Annual Meeting via the "chat" function on the Zoom platform. CHANTILLY FAIRFAX MANASSAS 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 571-395-4000 703-667-4167 703-349-2210 RESTON VIENNA MORTGAGE DIVISION 11700 Plaza America Drive, Suite 110 Reston, VA 22190 502 Maple Avenue West Vienna, VA 22180 4090 Lafayette Center Drive, Suite B Chantilly, VA 20151 703-663-2300 703-667-4170 703-766-6400 freedom.bank OTCQX : FDVA 00DFDDF

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