Freedom Financial Holdings Announces Earnings for Second Quarter of 2023

FAIRFAX, Va., July 28, 2023 /PRNewswire/ -- – Freedom Financial Holdings (OTCQX: FDVA), (the "Company" or "Freedom"), the holding company for The Freedom Bank of Virginia (the "Bank") today announced net income of $1,770,075, or $0.27 per diluted share, for the three months ended June 30, 2023. This compares to net income of $1,236,635  or $0.17 per diluted share, for the linked quarter and net income of $2,227,385 or $0.30 per diluted share for the three months ended June 30, 2022. Net income for the six months ended June 30, 2023, was $3,006,710 or $0.41 per diluted share, compared to $5,011,682 or $0.68 per diluted share for the three months, ended June 30, 2022.  

Joseph J. Thomas, President, and CEO, commented, "We are encouraged by improvements in the Company's second quarter performance with pre-tax income increasing by 83.97% compared to the first quarter of 2023.   We achieved continued growth of our balance sheet with steady annualized growth of loans held for investment of 11.24% and total deposits of 12.92% in the second quarter of 2023.  The low loan to deposit ratio of 80.45% and the high total capital ratio of 14.31% have enabled us to continue serving the needs of our clients and growing lead relationships during a period of turmoil in the industry.  Not unexpectedly in this era of rising interest rates, the net interest margin declined to 2.76% due to the higher cost of deposits.  We were able to mitigate the margin compression by increasing non-interest income by 18.08% in the quarter compared to the first quarter and reducing non-interest expense by 15.92% compared to the first quarter of 2023.  Considering the headwinds in deposits costs and net interest margin, the management team has launched a series of performance projects intended to increase fee-based revenues and lower non-interest expenses which will favorably impact results and further improve the efficiency ratio over the balance of 2023.  The Company continues to be proactive in managing performance in uncertain times and preparing for opportunities with its strong liquidity and capital positions."

Second Quarter 2023 Highlights include:

• Net income for the second quarter was $1,770,075 or $0.27 per diluted share compared to net income of $1,236,635 or $0.17 per diluted share in the linked quarter and net income of $2,227,385 or $0.30 per diluted share for the three months ending June 30, 2022.
• Return on Average Assets ("ROAA") was 0.69% for the quarter ended June 30, 2023, compared to 0.51% for the linked quarter and 1.01% for the three months ended June 30, 2022.
• Return on Average Equity ("ROAE") was 9.15% for the three months ended June 30, 2023, compared to 6.52% for the linked quarter and 11.44% for the three months ended June 30, 2022.
• Total Assets were $1.04 billion on June 30, 2023, an increase of $56.23 million or 5.71% from total assets on December 31, 2022.
• Loans held-for-investment (excluding PPP loans) increased by $19.82 million or by 2.81% during the quarter.
• Uninsured deposits were 25.78% of total deposits and total available secured liquidity was 121.45% of uninsured deposits on June 30, 2023.
• The tangible common equity ratio (adjusted for unrealized losses on held-to-maturity securities) was at 7.16% at the end of the quarter.
• Total deposits increased by $28.23 million or by 3.23% in the second quarter. Non-interest-bearing demand deposits decreased by $5.13 million from the linked quarter to $165.54 million and represented 18.33% of total deposits on June 30, 2023.
• The net interest margin² decreased in the second quarter to 2.76%, lower by 36 basis points compared to the linked quarter and lower by 89 basis points compared to the same period in 2022. The decrease in the net interest margin across linked and calendar quarters was primarily due to an increase in funding costs.
• The cost of funds was 3.05% for the second quarter, higher by 68 basis points compared to the linked quarter and higher by 260 basis points compared to the same period in 2022, as deposit costs increased, partially offset by income from balance sheet hedges.
• Non-interest income increased by 18.08% compared to the linked quarter and decreased by 32.91% compared to the same period in 2022. The increase in non-interest income in the second quarter of 2023 compared to the linked quarter was primarily due to a rebound in gain-on-sale revenue from mortgage loans. However, continued market volatility and higher yields, have led to the bank electing to retain more mortgage and SBA loans on the balance sheet in 2023.
• Non-interest expense in the second quarter decreased by 15.92% compared to the linked quarter and decreased by 10.69% compared to the same period in 2022. The decrease in non-interest expense for linked and calendar quarters, was due to a combination of lower compensation expenses and occupancy costs.
• The Efficiency Ratio³ was 69.02% for the quarter ended June 30, 2023, compared to 78.76% for the linked quarter and 65.10% for the same period in 2022.
• Net charge offs declined in the second quarter and were 0.04% of average loans. The ratio of non-accrual loans to loans held-for-investment was 0.93% on June 30, 2023, compared to 1.23% on December 31, 2022. The ratio of non-performing assets to total assets was 0.65% on June 30, 2023, compared to 0.88% on December 31, 2022.
• The Company recognized a $238,000 provision for loan losses during the second quarter and the ratio of the allowance for credit losses to loans held-for-investment was 0.98% compared to 1.01% in the linked quarter.
• The Company continues to be well capitalized and capital ratios continue to be strong with a Leverage ratio of 10.99%, Common Equity Tier 1 ratio of 13.52%, Tier 1 Risk Based Capital ratio of 13.52% and a Total Capital ratio of 14.37%.

Net Interest Income

The Company recorded net interest income of $6.70 million for the second quarter of 2023, lower by 6.96% compared to the linked quarter, and 12.04% lower than the same period in 2022. The net interest margin in the second quarter of 2023 was 2.76%, lower by 36 basis points compared to the linked quarter and lower by 89 basis points compared to the same period in 2022.

The following factors contributed to the changes in net interest margin during the second quarter of 2023 compared to the linked and calendar quarters:

• Yields on average earning assets increased to 5.68% compared to 5.38% in the linked quarter and compared to 4.08% in the calendar quarter. Higher yields on investment securities, loans and cash balances at the Federal Reserve drove the increase in yields on earning assets.
• Loan yields increased by 25 basis points to 6.00% from 5.75% in the linked quarter, while yields on investment securities increased by 37 basis points to 4.71% from 4.34% in the linked quarter. Loan yields increased by 133 basis points, while yields on investment securities increased by 193 basis points compared to the calendar quarter. Repricing of loans and securities in the higher rate environment was the primary reason for higher yields on these asset categories.
• Cost of funds increased by 68 basis points to 3.05% from 2.37% in the linked quarter, and by 260 basis points compared to the calendar quarter, due to rising rates on interest checking and money market deposit accounts and a decrease in non-interest-bearing deposits. The increase in deposit expense was partially offset by interest income from balance sheet hedges, in the form of interest rate swaps, whereby the bank pays a fixed rate and receives the Federal Funds effective rate for the duration of the swaps. The notional amount of the interest rate swaps was $50 million with a weighted average remaining term of 3.70 years, as of June 30, 2023.

Non-interest Income

Non-interest income was $1,112,000 for the second quarter, an increase of 18.08% when compared to the linked quarter and a decrease of 32.91% when compared to the same period in 2022. The increase in non-interest income in the second quarter compared to the linked quarter was primarily due to a rebound in gain-on-sale revenue from mortgage loans. However, continued market volatility and higher yields, has led to the bank electing to retain more mortgage and SBA loans on the balance sheet in 2023.

Total Revenue⁵

Total revenue, defined as the sum of net interest income, before provision for loan losses, and non-interest income, was lower by 4.06% compared to the linked quarter and lower by 15.77% compared to the calendar quarter in 2022, due to a combination of lower net interest income, resulting from net interest margin compression, as well as a decline in non-interest income stemming from reduced mortgage and SBA loan activity.

Non-interest Expenses

Non-interest expense in the second quarter decreased by 15.92% compared to the linked quarter and decreased by 10.69% compared to the same period in 2022. The decrease in non-interest expense for linked and calendar quarters, was due to a combination of lower compensation expenses and lower occupancy costs.

The Efficiency Ratio was 69.02% for the quarter ended June 30, 2023, compared to 78.76% for the linked quarter and 65.10% for the same period in 2022.

Asset Quality

Non-accrual loans were relatively unchanged in the second quarter at $6,776,013 or 0.93% of loans held-for-investment compared to $6,796,262 or 0.96% of loans held-for-investment at the end of the linked quarter. As of June 30, 2023, there were no loans that were 90 days or more past due and accruing.  There was no Other Real Estate Owned ("OREO") on the balance sheet as of June 30, 2023. Total non-performing assets (defined as the sum of loans on non-accrual, loans greater than 90 days past due and accruing, and OREO assets) were $6,776,013 or 0.65% of total assets as of June 30, 2023, compared to $6,796,262 or 0.67% of total assets, at the end of the linked quarter.

Following an assessment of the collectability of the loans held-for-investment at the end of the second quarter, it was determined that a $238,000 provision for loan losses was necessary to account for loan growth and changes to environmental factors. The Company booked a provision of $543,000 in the first quarter of 2023.

The Company's ratio of Allowance for Credit Losses to loans held-for-investment was 0.98% (or 0.98% of loans held-for investment excluding PPP loans) as of June 30, 2023, compared to the ratio of Allowance for Loan and Lease Losses to loans held-for-investment of 1.09% as of December 31, 2022 (or 1.10% of loans held-for-investment excluding PPP loans).

Total Assets

Total assets as of June 30, 2023, were $1.04 billion compared to  $1.01 billion on March 31, 2023, and total assets of $985.06 million on December 31, 2022.  Changes in major asset categories since December 31, 2022, were as follows:

• Available for sale investment balances increased by $14.79 million.
• Other loans held-for investment grew by $30.49 million
• Deferred tax assets increased by $5.51 million, primarily due to deferred taxes on investment securities

Total Liabilities

Total liabilities as of June 30, 2023, were $963.90 million compared to total liabilities of $937.21 million on March 31, 2023, and total liabilities of $910.12 million on December 31, 2022. Total deposits were  $903.20 million on June 30, 2023, compared to $874.97 million on March 31, 2023, and total deposits of $848.90 million as of December 31, 2022. Non-interest-bearing demand deposits decreased by $5.13 million during the second quarter and comprised 18.33% of total deposits at the end of the second quarter. Other interest-bearing demand deposits increased by $69.31 million, savings deposits were flat and time deposits decreased by $34.77 million during the quarter.

Stockholders' Equity and Capital

Stockholders' equity as of June 30, 2023 was $77.40 million compared to $77.26 million on March 31, 2023, and $74.95 million as of December 31, 2022. Additional paid-in capital was $58.37 million on June 30, 2023, compared to $58.36 million on March 31, 2023, and $58.24 million as of December 31, 2022. Accumulated Other Comprehensive Income ("AOCI"), which generally comprises unrealized gains and losses on available-for-sale securities and derivative positions, declined during the second quarter of 2023. Retained earnings were $37.24 million on June 30, 2023, compared to $35.47 million on March 31, 2023, and $34.11 million on December 31, 2022. Total shares issued and outstanding were 7,197,834 compared to 7,184,259 shares as of December 31, 2022. The tangible book value of the Company's common stock on June 30, 2023, was $10.61 per share compared to $10.43 per share on December 31, 2022. Excluding AOCI losses/gains, the tangible book value of the Company's common stock on June 30, 2023, was $13.11 per share compared to $12.87 per share on December 31, 2022.

As of June 30, 2023, the Bank's capital ratios were well above regulatory minimum capital ratios for well-capitalized bank holding companies. The Bank's capital ratios as of June 30, 2023, and December 31, 2022, were as follows:

About Freedom Financial Holdings, Inc.

Freedom Financial Holdings, Inc. is the holding company of The Freedom Bank of Virginia, a community bank with locations in Fairfax, Reston, Chantilly, Vienna, and Manassas, Virginia. The Freedom Bank of Virginia also has a mortgage division headquartered in Chantilly, Virginia and an SBA division headquartered in Harrison, NY. For information about deposits, loans and other services, visit the 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 Company operates and in which its loans are concentrated, including the effects of declines in real estate values, increases in unemployment levels, inflation, recessions and slowdowns in economic growth, including as a result of COVID-19 and the impact of geopolitical conflicts, such as the war between Russia and Ukraine;  adverse developments in the financial services industry such as the recent bank failures; 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, wars, terrorist acts or public health events, and of governmental and societal responses thereto; these potential adverse effects may include, without limitation, adverse effects on the ability of the Company's borrowers to satisfy their obligations to the Company, on the value of collateral securing loans, on the demand for the Company's loans or its other products and services, on incidents of cyberattack and fraud, on the Company's liquidity or capital positions, on risks posed by reliance on third-party service providers, on other aspects of the Company's business operations and on financial markets and economic growth. The Company 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 Company 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.