The Freedom Bank of Virginia Announces Earnings for the First Quarter of 2020
The Freedom Bank of Virginia (OTCQX:FDVA), (the "Bank" or "Freedom") today announced net income of $849,806, or $0.11 per diluted share, for the three months ended
Joseph J. Thomas, President and CEO, commented "Every employee across our company has been incredibly dedicated to serving clients and supporting our communities during the unfolding national health crisis. It is also very gratifying to see the results for shareholders improving with the company's net income of $849.8 thousand, or an ROAA of 0.68% for the first quarter, an increase of 13.6% over the prior quarter and higher by 64.7% compared to the first quarter in 2019. This also represents pre-tax, pre-provision income of $1.50 million in the first quarter of 2020, an increase of 58.9% over the prior quarter and 185.9% higher than the comparable quarter in 2019. This is equivalent to a pre-tax, pre-provision ROAA of 1.20% and enabled us to strengthen our loan loss reserves by $549 thousand and still improve net income. Our company enters into this unprecedented global contraction stronger than ever with the talent and technology to operate remotely for clients, the product lines to generate fee-based revenues (37% of total revenue in the first quarter of 2020) as net interest margins are compressed, and the capital and loan loss reserves to weather a sustained economic downturn."
First Quarter Highlights include:
Net income for the first quarter was $849,806 or $0.11 per diluted share compared to $747,808 or $0.10 per diluted share for the fourth quarter of 2019, and net income of $515,986 or $0.07 per diluted share, for the three months ended March 31, 2019;
Return on Average Assets ("ROAA") was 0.68% for the quarter ended March 31, 2020 compared to 0.59% for the prior quarter and 0.43% for the three months ended March 31, 2019;
Return on Average Equity ("ROAE") was 5.27% for the three months ended March 31, 2020 compared to 4.66% for the prior quarter and 3.51% for the three months ended March 31, 2019;
Total assets increased by $35.90 million during the first quarter to $536.29 million.
Total loans increased by $27.39 million or by 6.77% during the quarter. Loans held-for-investment increased by $9.50 million or by 2.42%, while loans held-for-sale increased by $17.88 million or by 153.41% in the first quarter; Available-for-sale Securities increased by $7.56 million or by 15.16% during the quarter;
Total deposits increased by $17.47 million or by 4.42% in the first quarter. Non-interest bearing demand deposits increased to $84.94 million and represented 20.58% of total deposits at the end of the quarter;
The net interest margin was 3.31% in the first quarter of 2020, lower by 2 basis points compared to the previous quarter and lower by 29 basis points for the same period in 2019. The net interest margin was pressured by lower earning asset yields, partially offset by a reduction in the cost of funds;
The cost of funds was 1.44% for the first quarter, lower by 10 basis points compared to the previous quarter and by 10 basis points compared to the same period in 2019, largely due to lower funding costs for borrowings, time deposits and interest bearing demand deposits;
Non-interest income increased by 91.34% compared to the previous quarter and increased by 154.43% compared to the same period in 2019, primarily due to higher revenue from the sale of mortgage loans, income from additional Bank Owned Life Insurance purchased during the first quarter of 2020 and swap fee income;
Non-interest expenses increased by 11.91% compared to the previous quarter and increased by 7.33% 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;
The Efficiency Ratio was 76.36% for the quarter ended March 31, 2020, compared to 82.10% for the previous quarter and 89.59% for the same period in 2019;
The Bank recognized a $549,000 provision for loan losses during the first quarter and the ratio of the allowance for loan and lease losses to loans held-for-investment increased to 1.16% compared to 1.05% in the previous quarter. The increase in reserves was due to loan growth during the first 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 12.88%, Common Equity Tier 1 ratio of 14.35%, Tier 1 Risk Based Capital ratio of 14.35% and a Total Capital ratio of 15.38%.
Net Interest Income
The Bank recorded net interest income of $3.98 million for the first quarter of 2020, a decrease of 1.49% compared to the previous quarter, and 3.24% less than the same period in 2019 The net interest margin in the first quarter of 2020 was 3.31%, lower by 2 basis points compared to the previous quarter, and lower by 29 basis points compared to the same period in 2019.
The following factors contributed to the changes in net interest margin during the first quarter of 2020 compared to the previous quarter:
Yields on average earning assets decreased by 12 basis points to 4.59% compared to 4.71% in the previous quarter, primarily due to a decrease in loan yields during the first quarter, stemming from loan payoffs and refinancing activity as well as a reduction in the 1-month LIBOR rate and the Prime rate during the first quarter.
Loan yields decreased by 13 basis points to 5.07% from 5.20% in the previous quarter, while yields on investment securities increased by 30 basis point to 2.62%, from 2.32% in the previous quarter.
Cost of funds decreased by 10 basis points to 1.44%, from 1.54% in the previous quarter, primarily due to lower costs related to borrowings, time deposits and interest bearing demand deposits and changes in the funding mix.
The following factors contributed to the changes in net interest margin during the first quarter compared to the same period in 2019:
Loan yields decreased by 35 basis points to 5.07% from 5.42% in the first quarter of 2019, while yields on investment securities decreased by 21 basis points to 2.62%, from 2.83% in the same period in 2019.
Cost of funds decreased by 10 basis points to 1.44%, from 1.54% in the first quarter of 2019, primarily due to lower costs related to borrowing and money market deposits.
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%, the term is two years and loan payments are deferred for six months. 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 139 loans totaling $61.0 million, in the initial PPP authorization. Upon reauthorization of the PPP loan program, the Bank had processed 263 additional loans for a total of $41 million, as of April 28th, 2020. The Bank expects to receive total processing fees of approximately $3 million from the SBA on the PPP loans processed through April 28th, 2020 The fees represent approximately 2.9% of PPP loan balances, and will be deferred through the term of the loans. The large volume of PPP loans processed by the Bank will lower our loan yields in subsequent quarters and as long as the loans are on the Bank's balance sheet.
Non-interest income was $2.37 million for the first quarter, higher by 91.34% compared to the previous quarter and higher by 154.43% compared to the same period in 2019. The principal contributor to the increase in non-interest income in the first 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 income from additional Bank Owned Life Insurance that was purchased during the first quarter.
Non-interest expenses in the first quarter of 2020 increased by 11.91% compared to the previous quarter and increased by 7.33% 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.
Additional categories of non-interest expenses that changed in the first quarter of 2020 were the following:
Professional fees were lower by 7.60% in the first quarter of 2020 compared to the same period in 2019, primarily due to a streamlining of vendor agreements, and more efficient use of legal services.
Data processing expenses in the first quarter were lower by 25.91% compared to the same period in 2019, primarily due to re-negotiation of certain vendor agreements and more efficient utilization of data processing services.
Advertising expenses in the first quarter of 2020 declined relative to the previous quarter on curtailed media advertising.
Non-accrual loans were $2.16 million or 0.50% of total loans at the end of the first quarter of 2020, compared to $1.70 million or 0.42% of total loans at the end of the prior quarter. As of both March 31, 2020 and December 31, 2019, there were no troubled debt restructurings ("TDRs"). On March 31, 2020 there was one loan with a book balance of $150,000 that was 90 days or more past due and accruing, compared to $4.52 million of loans that were 90 days or more past due and accruing, equivalent to 1.15% of total loans on December 31, 2019. There was no Other Real Estate Owned ("OREO") on the balance sheet on March 31, 2020 or December 31, 2019. Total non-performing assets (defined as the sum of loans on non-accrual, loans greater than 90 days past due and accruing, loans that were TDRs but not on non-accrual, and OREO assets) were $2.31 million or 0.43% of total assets at March 31, 2020 compared to $6.23 million or 1.24% of total assets, at the end of the previous quarter.
As of April 28th, pursuant to the CARES Act and interagency guidance on loan modifications related to COVID-19, the Bank granted loan payment deferrals of up to six months to 81 affected borrowers representing $93 million of outstanding loan balances.
Following an assessment of the collectability of the loans held-for-investment at the end of the first quarter, it was determined that an additional provision for loan losses of $549,000 was necessary to account for loan growth as well as the deteriorating macro-economic outlook as a result of the COVID-19 outbreak. The Bank's ALLL ratio was 1.16% of loans held-for investment on March 31, 2020 compared to an ALLL ratio of 1.05% at December 31, 2019.
Total assets at March 31, 2020 were $536.29 million compared to $500.39 million on December 31, 2019. Changes in major asset categories during linked quarters were as follows:
Cash balances and deposits with other banks decreased by $4.28 million during the quarter.
The available-for-sale securities portfolio increased by $7.56 million compared to December 31, 2019.
Loans held-for-investment increased by $9.50 million during the quarter.
Loans held-for-sale increased by $17.88 million during the quarter.
Total liabilities at March 31, 2020 were $471.02 million compared to total liabilities of $436.37 million on December 31, 2019, Total deposits were $412.68 million on March 31, 2020 compared to total deposits of $395.21 million on December 31, 2019. On a linked quarter basis, interest bearing demand deposits increased by $23.22 million, with the bulk of the increase occurring in low cost interest checking balances, while time deposits declined by $10.17 million. Non-interest bearing demand deposits increased during the quarter as well to $84.94 million, and comprised 20.58% of total deposits at the end of the quarter, compared to 18.41% of total deposits on March 31, 2019. The change in funding mix enables the Bank's cost of funds to benefit from lower interest rates. Federal Home Loan Bank advances increased by $16.86 million during the quarter, as the bank took advantage of low borrowing costs to bolster balance sheet liquidity.
Stockholders' Equity and Capital
Stockholders' equity at March 31, 2020 was $65.27 million compared to $64.03 million on December 31, 2019. Additional paid in capital at March 31, 2020 was $58.65 million compared to $58.53 million on December 31, 2019. Accumulated Other Comprehensive Income ("AOCI"), which generally comprises unrealized gains and losses on available-for-sale securities on the balance sheet, increased by $270,395 on unrealized gains during the first quarter of 2020. Total shares issued and outstanding were 7,238,751 on March 31, 2020 compared to 7,221,046 shares on December 31, 2019 and 6,996,602 shares on March 31, 2019. The book value of the Bank's common stock at March 31, 2020 was $9.02 per share compared to $8.86 per share on December 31, 2019.
As of March 31, 2020, all of the Bank's capital ratios were well above regulatory minimum capital ratios for well capitalized banks. The Bank's capital ratios on March 31, 2020 and December 31, 2019 were as follows:
March 31, 2020 December 31, 2019
Total Capital Ratio 15.38% 16.24%
Tier 1 Capital Ratio 14.35% 15.26%
Common Equity Tier 1 Capital Ratio 14.35% 15.26%
Leverage Ratio 12.88% 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.
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