The Freedom Bank of Virginia Announces Earnings for the Second Quarter of 2020

FAIRFAX, VA / ACCESSWIRE / July 30, 2020 / The Freedom Bank of Virginia (OTCQX:FDVA), (the “Bank” or “Freedom”) today announced net income of $1,525,525, or $0.21 per diluted share, for the three months ended June 30, 2020. This compares to net income of $849,806 or $0.11 per diluted share, for the prior quarter and net income of $509,075 or $0.07 per diluted share for the three months ending June 30, 2019. The Bank reported net income of $2,375,331 or $0.33 per diluted share for the six months ended June 30, 2020 compared to net income of $1,025,062 or $0.14 per diluted share for the six months ended June 30, 2019.

Joseph J. Thomas, President and CEO, commented “The talents of our team at Freedom Bank were in full display in the first half of 2020 as we transitioned to a remote work environment due to COVID-19, yet achieved record loan volume with 510 loans funded through the Small Business Administration’s Paycheck Protection Program (PPP loans) totaling $106.37 million and 478 residential mortgage loans funded totaling $173.07 million. Despite the very challenging economic environment, this activity enabled the Bank to grow total loans to $545.72 million, a 35.4% increase, and non-interest income to $5.64 million, a 141.8% increase in the first half of 2020 compared to the same period in 2019. As a result, we reported record earnings of $1.53 million or $0.21 per diluted share in the second quarter of 2020, which translates into a Return on Average Assets of 0.92% and a Return on Average Equity of 9.24%. Freedom also continues to demonstrate exceptional resiliency with strong earnings, additional contributions to our high level of allowance for loan losses at 1.02% of loans held-for-investment (or 1.28% of loans held-for-investment when excluding PPP loans) and a fortress balance sheet with strong capital represented by a Tier 1 Risk Based Capital ratio of 13.90% at the end of the second quarter.”

Second Quarter Highlights include:

• Net income increased by 79.51% compared to the prior quarter and by 199.67% compared to the same period in 2019. Net income for the second quarter was $1,525,525 or $0.21 per diluted share compared to net income of $849,806 or $0.11 per diluted share in the prior quarter and net income of $509,075 or $0.07 per diluted share for the three months ended June 30, 2019;
• Net income for the first six months of 2020 increased by 131.73% compared to the same period in 2019. Net income was $2,375,331 or $0.33 per diluted shares, compared to net income of $1,025,062 or $0.14 per diluted share for the same period in 2019;
• Return on Average Assets (“ROAA”) was 0.92% for the quarter ended June 30, 2020 compared to 0.68% for the prior quarter and 0.42% for the three months ended June 30, 2019;
• Return on Average Equity (“ROAE”) was 9.24% for the three months ended June 30, 2020 compared to 5.27% for the prior quarter and 3.36% for the three months ended June 30, 2019;
• Total assets were $697.75 million on June 30, 2020, an increase of $197.32 million from December 31, 2019;
• Total loans increased by $113.74 million or by 26.33% during the quarter, including $104.59 million of PPP loans. Other loans held-for-investment increased by $6.80 million or by 1.69%, while loans held-for-sale increased by $2.35 million or by 7.96% in the second quarter;
• On-balance sheet liquidity, comprising cash and deposits at other banks and available-for sale securities, increased by $48.09 million or 61.03% in the second quarter;
• Total deposits increased by $75.22 million or by 18.23% in the second quarter. Non-interest bearing demand deposits increased to $153.84 million and represented 31.53% of total deposits at the end of the quarter;
• The net interest margin was 2.93% in the second quarter, lower by 33 basis points compared to the previous quarter and lower by 34 basis points compared to the same period in 2019. The net interest margin was pressured by lower earning asset yields, largely driven by an abundance of liquidity and low yielding PPP loans, partially offset by a reduction in the cost of funds;
• The cost of funds was 0.88% for the second quarter, lower by 56 basis points compared to the previous quarter and lower by 78 basis points compared to the same period in 2019, as deposit rates were reduced across the board, the PPP loans generated an influx of non-interest bearing deposits, and the cost of borrowings was reduced by low cost PPP Liquidity Facility Advances;
• Non-interest income increased by 37.72% compared to the previous quarter and increased by 133.33% compared to the same period in 2019, primarily due to higher revenue from the sale of mortgage loans,

Swap fee income and higher income from Bank Owned Life Insurance;

• Non-interest expenses increased by 13.30% compared to the previous quarter and increased by 23.51% compared to the same period in 2019, primarily due to higher compensation costs related to commissions paid to mortgage loan officers and an increase in mortgage settlement costs. Excluding mortgage costs, non-interest expenses decreased by 3.33% compared to the previous quarter and decreased by 9.18% compared to the same period in 2019;
• The Efficiency Ratio was 67.97% for the quarter ended June 30, 2020, compared to 76.15% for the prior quarter and 84.97% for the same period in 2019. Excluding mortgage revenues and mortgage costs, the efficiency ratio was 66.64% for the quarter compared to 83.92% for the prior quarter and 89.42% for the same period in 2019;
• The Bank recognized a $705,000 provision for loan losses during the second quarter and the ratio of the allowance for loan and lease losses to loans held-for-investment was 1.02% (or 1.28% excluding PPP loans, which carry a full faith and guarantee by the US Government) compared to 1.16% in the previous quarter. The increase in reserves related to the provision for loan losses was net of loan charge offs of $150,000, and was due to loan growth during the second quarter as well as a deterioration in the economy stemming from COVID-19;
• The Bank is well capitalized and capital ratios continue to be strong with a Leverage ratio of 11.23%, Common Equity Tier 1 ratio of 13.90%, Tier 1 Risk Based Capital ratio of 13.90% and a Total Capital ratio of 14.99%.

Net Interest Income

The Bank recorded net interest income of $4.72 million for the second quarter of 2020, an increase of 20.40% compared to the previous quarter, and 25.11% higher than the same period in 2019. The net interest margin in the second quarter of 2020 was 2.93%, lower by 33 basis points compared to the previous quarter and lower by 34 basis points compared to the same period in 2019.

The following factors contributed to the changes in net interest margin during the second quarter of 2020 compared to the previous quarter:

• Yields on average earning assets decreased by 80 basis points to 3.75% compared to 4.55% in the previous quarter, primarily due to an abundance of liquidity and a decrease in loan yields during the second quarter, largely due to lower yields on PPP loans. Yields on investment securities and cash declined sharply as well, primarily due to growth in liquid assets, combined with reductions in bond yields and interest paid on cash balances.
• Loan yields decreased by 67 basis points to 4.35% from 5.02% in the previous quarter, while yields on investment securities decreased by 11 basis point to 2.51%, from 2.62% in the previous quarter.
• Cost of funds decreased by 56 basis points to 0.88%, from 1.44% in the previous quarter, primarily due to an influx of non-interest bearing deposits from PPP loans that were funded in the second quarter, lower costs related to borrowings and interest bearing deposits. Borrowings included term advances from the PPP Liquidity Facility at a fixed rate of 0.35% to fund the PPP loans.

The following factors contributed to the changes in net interest margin during the second quarter compared to the same period in 2019:

• Loan yields decreased by 82 basis points to 4.35% from 5.17% in the second quarter of 2019, while yields on investment securities decreased by 29 basis points to 2.51%, from 2.80% in the same period in 2019.
• Cost of funds decreased by 78 basis points to 0.88%, from 1.66% in the second quarter of 2019, primarily due to an influx in non-interest bearing deposits from PPP loans funded in the second quarter, lower costs related to borrowings and interest bearing deposits. Borrowings included term advances from the PPP Liquidity Facility at a fixed rate of 0.35% to fund the PPP loans.

As the COVID-19 outbreak spread across the country and the macroeconomic outlook deteriorated, interest rates declined and the Federal Reserve implemented a series of actions in March to stabilize markets. These actions included a reduction in the Federal Funds target by 150 basis points, increased purchases of mortgage backed securities and Treasuries and the announcement of a number of new lending programs. The decline in interest rates has put pressure on yields for all earning assets and while we have reduced deposit and borrowing costs and expect our cost-of-funds to decline, net interest margin will continue to be under pressure.

On March 27, 2020, the President signed H.R. 748, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) into law. Among other provisions, the CARES Act authorized the Payment Protection Program (“PPP”). The PPP provides small businesses with 500 or fewer employees with funds to pay up to eight weeks of payroll costs including benefits, interest on mortgages, rent and utilities. Funds were made available in the form of fully guaranteed 7(a) loans administered by the Small Business Administration (“SBA”), and made by approved SBA lenders. The loan amounts disbursed may be forgiven in whole or in part by the SBA. The interest rate on the PPP loans is 1% and the term varies from two to five years (loan term of five years for PPP loans originated pursuant to the Paycheck Protection Program Flexibility Act, signed into law on June 5, 2020). Additionally, the SBA pays processing fees to the lenders, which vary depending upon the loan amount.

As an approved SBA lender, the Bank participated in the PPP loan program, processed and funded 510 loans with outstanding balances of $106.37 million in the second quarter. The Bank expects to receive total processing fees of approximately $3.23 million from the SBA on the PPP loans. The fees represent approximately 3.09% of PPP loan balances, and will be deferred through the term of the loans. The large volume of PPP loans processed by the Bank lowered our loan yields in the second quarter and will do as long as the loans are on the Bank’s balance sheet. The Bank funded the PPP loans with term advances from the PPP Liquidity Facility at a fixed rate of 0.35%.

Non-interest Income

Non-interest income was $3.27 million for the second quarter, higher by 37.72% compared to the previous quarter and higher by 133.33% compared to the same period in 2019. The principal contributor to the increase in non-interest income in the second quarter of 2020 compared to the previous quarter was higher gain-on-sale revenue from mortgage loans, stemming from an increase in mortgage refinancing activity. Other factors that contributed to the increase in non-interest income were swap fees and higher income from Bank Owned Life Insurance.

Non-interest Expenses

Non-interest expenses in the second quarter of 2020 increased by 13.30% compared to the previous quarter and increased by 23.51% compared to the same period in 2019. The increase was largely driven by higher commissions paid to mortgage loan officers and an increase in mortgage settlement costs on higher closed loan volume during the quarter. Excluding mortgage related costs, non-interest expenses decreased by 3.33% compared to the prior quarter and by 8.03% compared to the same period in 2019. Excluding mortgage related costs, non-interest expenses incurred in the first six months of 2020 declined by 9.18% compared to the same period in 2019.

Additional categories of non-interest expenses that changed in the second quarter of 2020 were the following:

• Professional fees were higher by 15.69% in the second quarter of 2020 compared to the previous quarter, primarily related to costs incurred in processing PPP loans.
• Data processing expenses in the second quarter were higher by 64.21% compared to the previous quarter, primarily due to the increase in loan and deposit activity and asset growth during the quarter.
• Advertising expenses in the second quarter of 2020 declined relative to the previous quarter on curtailed media advertising.

The Efficiency Ratio was 67.97% for the quarter ended June 30, 2020, compared to 76.15% for the prior quarter and 84.97% for the same period in 2019. Excluding mortgage revenues and mortgage costs, the efficiency ratio was 66.64% for the quarter compared to 83.92% for the prior quarter and 89.42% for the same period in 2019.

The Efficiency ratio for the first six months of 2020 was 71.97% compared to 87.25% for the same period in 2019. Excluding mortgage related costs and revenues, the efficiency ratio for the first six months of 2020 was 74.43% compared to 89.47% for the same period in 2019.

Asset Quality

Non-accrual loans were $3.89 million or 0.71% of total loans at the end of the second quarter of 2020, compared to $2.16 million or 0.50% of total loans at the end of the prior quarter. There were no troubled debt restructurings (“TDRs”) as of June 30, 2020. On June 30, 2020, there was one loan with a book balance of $80,000 that was 90 days or more past due and accruing, equivalent to 0.01% of total loans, compared to $150,000 of loans that were 90 days or more past due and accruing, equivalent to 0.03% of total loans on March 31, 2020. There was no Other Real Estate Owned (“OREO”) on the balance sheet as of June 30, 2020. Total non-performing assets (defined as the sum of loans on non-accrual, loans greater than 90 days past due and accruing, loans that are TDRs but not on non-accrual, and OREO assets) were $3.97 million or 0.57% of total assets at June 30, 2020 compared to $2.31 million or 0.43% of total assets, at the end of the previous quarter.

As of June 30, 2020, pursuant to the CARES Act and interagency guidance on loan modifications related to COVID-19, the Bank had granted loan payment deferrals of up to six months to 96 borrowers representing $89.35 million of outstanding loan balances or 17.39% of loans held-for-investment (or 21.84% of loans held-for-investment excluding PPP loans).

The table above shows the Bank’s loans to certain industry sectors that are likely to be most impacted by the COVID-19 outbreak and therefore deemed higher risk. These industry sectors include retail, restaurants, hotels, fitness center and churches, As of June 30, 2020, the Bank had $39.62 million of outstanding loans to these industry sectors, representing 7.73% of loans held-for-investment (or 9.72% of loans held-for-investment excluding PPP loans). Loan deferrals were $21.36 million or 53.90% of outstanding loans to borrowers in these higher risk industry sectors.

Following an assessment of the collectability of the loans held-for-investment at the end of the second quarter, it was determined that a provision for loan losses of $705,000 was necessary to account for loan charge offs, loan growth as well as the deteriorating macro-economic outlook because of the COVID-19 outbreak. The Bank booked a provision of $549,000 in the first quarter of 2020. The Bank’s ALLL ratio was 1.02% of loans held-for-investment (or 1.28% of loans held-for investment excluding PPP loans) as of June 30, 2020 compared to an ALLL ratio of 1.16% at March 31, 2020.

Total Assets

Total assets at June 30, 2020 were $697.75 million compared to $536.29 million on March 31, 2020. Changes in major asset categories during linked quarters were as follows:

• Cash balances and deposits with other banks increased by $16.77 million, while available-for-sale securities increased by $31.32 million.
• Loans held-for-investment increased by $111.33 million, including PPP loan growth of $104.59 million and $6.74 million of other loans.

Total Liabilities

Total liabilities at June 30, 2020 were $630.20 million compared to total liabilities of $471.02 million on March 31, 2020. Total deposits were $487.90 million compared to total deposits of $412.68 million on March 31, 2020. On a linked quarter basis, interest bearing demand deposits increased by $14.65 million, with the bulk of the increase occurring in low cost interest checking and money market balances, while time deposits declined by $9.36 million. Non-interest bearing demand deposits increased during the quarter as well to $153.84 million, and comprised 31.53% of total deposits at the end of the quarter, compared to 20.58% of total deposits on March 31, 2020. The change in funding mix enables the Bank’s cost of funds to benefit from lower interest rates. Federal Home Loan Bank advances declined by $21.50 million during the quarter, while the Bank added $104.69 million in PPP Liquidity Facility term advances to fund PPP loans.

Stockholders’ Equity and Capital

Stockholders’ equity at June 30, 2020 was $67.55 million compared to $65.27 million on March 31, 2020. Additional paid in capital at June 30, 2020 was $58.75 million on June 30, 2020 compared to $58.65 million on March 31, 2020. Accumulated Other Comprehensive Income (“AOCI”), which generally comprises unrealized gains and losses on available-for-sale securities on the balance sheet, increased by $655,273 on unrealized gains during the second quarter of 2020. Total shares issued and outstanding were 7,238,751 on June 30, 2020 compared to 7,238,751 shares on March 31, 2020, and 7,122,102 shares on June 30, 2019. The tangible book value of the Bank’s common stock at June 30, 2020 was $9.33 per share compared to $9.02 per share on March 31, 2020 and $8.60 per share on June 30, 2019.

As of June 30, 2020 of the Bank’s capital ratios were well above regulatory minimum capital ratios for well-capitalized banks. The Bank’s capital ratios on June 30, 2020 and December 31, 2019 were as follows:

June 30, 2020 December 31, 2019

Total Capital Ratio 14.99% 16.24%

Tier 1 Capital Ratio 13.90% 15.26%

Common Equity

Tier 1 Capital Ratio 13.90% 15.26%

Leverage Ratio 11.23% 12.80%

About Freedom Bank

Freedom Bank is a community-oriented bank with locations in Fairfax, Reston, Chantilly and Vienna, Virginia. Freedom Bank also has a mortgage division headquartered in Chantilly. For information about Freedom Bank’s deposit and loan services, visit the Bank’s website at www.freedom.bank

Forward Looking Statements

This release contains forward-looking statements, including our expectations with respect to future events that are subject to various risks and uncertainties. Factors that could cause actual results to differ materially from management’s projections, forecasts, estimates and expectations include: fluctuation in market rates of interest and loan and deposit pricing; general economic and financial market conditions, in the United States generally and particularly in the markets in which the Bank operates and which its loans are concentrated, including the effects of declines in real estate values, an increase in unemployment levels and slowdowns in economic growth, including as a result of COVID-19; maintenance and development of well-established and valued client relationships and referral source relationships; the adequacy or inadequacy of our allowance for loan and lease losses; acquisition or loss of key production personnel; and the potential adverse effects of unusual and infrequently occurring events, such as weather-related disasters, terrorist acts or public health events (such as COVID-19), and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Bank’s borrowers to satisfy their obligations to the Bank, on the value of collateral securing loans, on the demand for the Bank’s loans or its other products and services, on incidents of cyberattack and fraud, on the Bank’s liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Bank’s business operations and on financial markets and economic growth. The Bank cautions readers that the list of factors above is not exclusive. The forward-looking statements are made as of the date of this release, and the Bank may not undertake steps to update the forward-looking statements to reflect the impact of any circumstances or events that arise after the date the forward-looking statements are made. In addition, our past results of operations are not necessarily indicative of future performance. Some of the financial tables in this document reflect classifications to accounts to improve consistency in financial reporting.

Contact:

Joseph J. Thomas
President & Chief Executive Officer
703-667-4161: Phone
jthomas@freedom.bank: Email