Emerging Ideas In Community Banking

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1 Source (all data): FIG Partners Research, SNL Financial LC David J. Bishop, CFA Emerging Ideas In Community Banking March 6, 2017 FDVA Freedom Bank of Virginia Fundamental Observations Spring 2017 Freedom Bank of Virginia (FDVA) is a locally-owned Bank based in Northern Virginia with reported Assets of $497 Million at December 31, 2016, and Deposits of $399 Million. The company conducts its Banking activities through three branches in Fairfax, Reston, and Vienna, Virginia. Since 2011, there has been a 20% annual growth in assets due in part to the fact that the bank serves the 6th largest market (Washington DC MSA) in the U.S. and has made strategic hires of experienced inmarket executives. Freedom Bank raised equity capital via a private placement of approximately $16.0 Million during late 2015 and early 2016 that allows significant runway for Loan growth in our view. The Bank currently trades on the OTCQX market under the symbol FDVA. Fourth quarter 2016 represented record results for the company with Net Income of $957,000 or an increase of 63% from the year ago period. This was driven by a combination of Spread Income growth (22%) and Fee Income with Gain on Mortgage Loan Sales (up 96% YOY) driving Non-Interest Income up 40%. Earnings per share rose to $0.15 during 4Q16 from $0.13 in the year ago quarter despite a Capital raised in late 2015/early 2016 that inflated the total share count. Management hopes to exceed the 2016 EPS figure this year Loan growth was strong at $76.1 Mil., or 26.9% over the past twelve months with Non-Owner Occupied CRE driving the increase at 45.8% growth over the LTM and healthy growth in Commercial Loans at 36.8%. Management is targeting growth in government contractor Lending segment to drive both Core Deposit and C&I Loan growth in That being said, FDVA remains focused on quality Loan growth and likely grows at a slightly slower rate in 2017 (thereby also conserving Capital). Stock Details Balance Sheet ($000s) Market Cap. (MM) Stock Price Price-to- Tang.Book Yield EPS Last 4 Qtrs. Assets Loans Deposits $83.4 $ % NA $ , , ,392 Franchise Data Since 2009 TCE Deposit Premium # Branches Deposits-per- Branch ($MM) CDs % of Tang. Book Value Assets Share Count 10.4% 8.0% 3 $ % 64% 216% 65% Market Demographics Headquarters MSA Washington-Arlington-Alexandria, DC-VA- MD-WV (Metro) Household Income Shares (MM) Common Shares & Ownership Insiders Institutional Investors $68, NA 4% Ideas & Execution on Financial Institutions (404) Atlanta Chicago Jacksonville Los Angeles New York Raleigh San Francisco Member of FINRA/SIPC

2 APPENDIX: Our Analysis Of Key Points From The FDIC Call Report Filing Certain figures and ratios may differ from the company s external filings. We use the FDIC call reports for their uniform data and disclosures which are not available in all other public reports. Investors should also consider reviewing the company s SEC filings. Liability Repricing factors a lag or delay on new rates for 50% of all MMDA and 85% of Savings accounts. Adj. Core ROA removes all gains and uses a 4-qtr. average Loan Sale income. Source: FIG Partners Research, FDIC Call Report filings, SNL Financial LC THE BASICS Company Name Freedom Bank of Virginia PROFITS ROA (as reported) 0.79% Status Current Adj. Core ROA (LLP = NCOs) 0.84% Charter Type Commercial Bank MSA/CBSA Name Washington, DC-VA-MD LOANS ADC / Construction 13% City Fairfax Multifamily State VA Owner-Occ. CRE 20% Parent Name Other CRE 27% Parent FDVA C&I 15% TOTAL ASSETS $496,501 HELOCs Tier 1 Leverage 10.8% 1-4 Family 1st Lien 18% BALANCE Cash 6% SHEET Securities 9% DEPOSITS Non-Int. Bearing 16% ( % of Assets ) Loans 84% NOW 2% Deposits (% of Liab.) 90% Other Savings All Debt (% of Liab.) 10% MMDA 27% Loan-to-Deposit 102% CDs Up to $250k 45% CDs Over $250k 10% HTM vs. AFS % HTM Securities (of Assets) 3% Broker Deposits 18% % AFS Securities (of Assets) 6% SECURITIES US Treasuries 0% COST / YIELD Cost of Int-Bear. Dep (%) 1.12 ( % of AFS ) Govt. Agencies 23% Cost of Funds (%) 0.93 Govt.-Sponsored Agencies 0% Municipals (State & Local) 0% Yield on Secs. (%) 1.87 Pass-Through RMBS 40% Yield on Loans (%) 5.22 Other RMBS 20% Net Interest Margin (%) 3.92 CMBS 7% Asset-Backed Sec. (ABS) 0% CREDIT TOTAL PROBLEM RATIO (excl PD) 0.3% Structured Financial Products 0% Problem Loans % of Tier 1 + Reserves 2% Tot Other Debt Secs 10% Day Past Due % (12/31) 0.00% Mutual Funds, et al 0% Day Past Due % (9/30) 0.00% Net Charge-Offs % (12/31) 0.1 REPRICING % Repricing Assets-to- Assets 35% Net Charge-Offs %(9/30) (0.00%) ( 1 Year ) % ADJUSTED-Repricing Liabilities % of Assets 52% Reserves % of Loans 1.00% Securities Repricing as % of Securities 2 Reserves-to-3YR Historical Loss 17.9x Loans Repricing as % of Loans 34% CDs Repricing as % of Deposits 4 EXPENSES Expenses-to-Avg. Assets 3.5% Debt Repricing as % of Debt 89% ( annualized ) Salary Exp-to-Avg. Assets 2. Occupancy Exp-to-Avg. Assets 0.3% MATURITY % Loans Mature or Reprice in 3 to 5 YRS 16% Other Exp-to-Avg. Assets 1. % Loans Mature or Reprice in >5 YRS 30% Efficiency 72.3% Non-Resid. Loans Maturing >5YRS 28% 2

3 Loan Analysis: FDVA -Freedom Bank of Virginia vs. Other Community Banks In The DC Metro Area Institution Name Parent Risk- Based Capital Assets ADC % of RBC Multi- Family % of RBC Owner- Occ. CRE % of RBC Other CRE % of RBC ADC + M/F + Other CRE % of RBC Change in Concentration: ADC + M/F + Other CRE 2016Q4 2016Q4 2016Q4 2016Q4 2016Q4 2016Q4 2016Q4 4Q16 vs 3Q16 3Q16 vs 2Q16 2Q16 vs 1Q16 4Q16 vs 4Q15 Freedom Bank of Virginia FDVA ,501 93% 9% 149% 198% 30 (10%) 26% 34% 34% Bank of Lancaster BAYK ,134 85% 9% 89% 66% 160% 4% (2%) (6%) Virginia Commonwealth Bank ,977 29% 27% 66% 214% 270% (14%) (26%) (5%) 7% Cardinal Bank CFNL ,169,472 98% 48% 93% 236% 383% (1) 5% (5%) (8%) EagleBank EGBN ,877, % 42% 77% % 0% (62%) 0% (72%) First Virginia Community Bank FVCB ,785 69% 38% 96% 243% 349% 5 15% (66%) 0% John Marshall Bank JMSB ,075, % 113% 268% 435% 10% 19% 3% 39% MainStreet Bank MNSB ,711 87% 18% 145% 157% 262% (77%) 13% 10% (43%) Old Line Bank OLBK ,712,652 70% % 422% 3% (55%) 28% (14%) Sonabank SONA ,142,002 74% 24% 125% 227% 325% (14%) () 16% 24% United Bank UBSI ,017,236 75% 34% 68% 197% 306% (45%) (10%) (2) (83%) WashingtonFirst Bank WFBI ,999, % 20% 108% % 32% 0% 46% Source: FIG Partners Research, SNL Financial Management of Freedom Bank of Virginia is very cognizant of the current regulatory dialogue and focus on CRE Concentrations relative to Risk-Based Capital. During the most recent quarter the bank did manage down its CRE Concentration ratio by 10bps to 30 so it is just over the 300% threshold for CRE Bank designation. While Non-Owner Occupied CRE is well diversified by product type and geography (on a relative basis within the footprint) management is focused on growing its C&I exposure and Owner-Occupied CRE. Additionally, in recognition of the thresholds enumerated by regulators the company has also begun selling participations in CRE loans to alleviate the build in the CRE ratio and also demonstrate the ability to turn these loans into liquid assets. 3

4 Deposit Analysis: FDVA -Freedom Bank of Virginia vs. Other Community Banks In The DC Metro Area Peer Analysis Company Name Market Cap. ($M) Assets CDs % of TCE Deposit Premium Core Deposit Premium Forward 4- Quarter P/E MRQ MRQ MRQ Today Today 3/3/2017 3/3/2017 FDVA Freedom Bnk of Va $83 $496, % 17.6% x BAYK Bay Bks of VA $40 $486, % 0.3% 102 NA CFNL Cardinal Financial $1,045 $4,210, % x EGBN Eagle Bancorp $2,145 $6,890, % 28.4% x FVCB FVCBankcorp Inc $156 $909, % 14.3% x JMSB John Marshall Bk $226 $1,075, % 26.5% 190 NA MNSB MainStreet Bcshs $91 $575, % 12.0% 155 NA OLBK Old Line Bcshs Inc $315 $1,716, % 20.6% x SONA Southern National $209 $1,142, % 30.7% 182 NM UBSI United Bkshs Inc $3,663 $14,508, % 26.2% x WFBI WashingtonFirst $354 $2,002, % 17.5% x Source: FIG Partners Research, SNL Financial LC. Price-to- Tangible Book FDVA shares trade at a modest discount to its DC/Northern VA peers and reflect its emerging Core Deposit franchise. Reliance on CDs has supported the funding base over the past year but this has transitioned to more Core funding. With no significant Expense build on the horizon combined with a very strong local economy, we project profitability building through 2018 that could approach a 1.0% ROA. Thus, we forecast that TBV can grow to about $9.00 by 12/17 and $9.70 by December 2018 with concurrent ROTCE of 7.6% on average. Given zero dividend payments we believe TCE can support mid-teens Loan during the next two years. Company Name Parent TOTAL DEPOSITS LOANS-to- DEPOSITS Deposit Deposit Core Deposit Core Deposit DDA % of Core % of 2016Q4 2016Q4 Linked-Qtr. YR/YR Linked-Qtr. YR/YR 2016Q4 2016Q4 Freedom Bank of Virginia FDVA 399, % (3.6%) 14.3% % 16% 45% Bank of Lancaster BAYK 383, % % 1.6% 9.9% 5% 67% Cardinal Bank CFNL 3,299,603 99% 0.9% 8.2% (2.3%) 8.0% 6% 6 EagleBank EGBN 5,807,707 98% 2.8% % 33% 87% First Virginia Community Bank FVCB 776,740 99% % 3.3% 29.2% 10% 69% John Marshall Bank JMSB 832, % 4.9% 14.0% 2.0% 6.3% 23% 50% MainStreet Bank MNSB 475,185 98% 6.4% 23.2% 16.2% 61.8% 3 57% Old Line Bank OLBK 1,331, % 1.9% 7.7% 2.3% 9.8% 4% 65% Sonabank SONA 914, % (0.5%) 10.6% (2.5%) 4.8% 1 34% United Bank UBSI 6,158,368 87% 3.0% 22.8% % 3 82% WashingtonFirst Bank WFBI 1,536, % (0.7%) 13.9% (5.3%) 11.2% 9% 66% 4

5 Peer Analysis: FDVA -Freedom Bank of Virginia vs. Other Community Banks In The DC-MD-VA Area Balance Sheet Composition (% Assets) Profitability Parent Assets Tier 1 Leverage Cash Securities Loans Deposits All Debt Loan-to- Deposit ROA (as reported) Adj. Core ROA (LLP = NCOs) Freedom Bank of Virginia FDVA 496, % 6.0% 8.9% 83.5% 89.8% 9.8% 102% 0.79% 0.84% Bank of Lancaster BAYK 483, % 3.6% 10.6% 79.8% 87.3% % 0.96% 0.89% Cardinal Bank CFNL 4,169, % 2.4% 9.4% 85.8% 88.7% 10.8% 99% 1.25% 1.50% EagleBank EGBN 6,877, % 5.4% 7.8% 83.2% % 98% 1.52% 1.5 First Virginia Community Bank FVCB 907, % 1.0% 12.3% 84.6% 96.3% 3.3% 99% 1.07% 1.07% John Marshall Bank JMSB 1,075, % % 83.2% % 107% 1.04% 1.04% MainStreet Bank MNSB 575, % % 81.3% 91.9% 7.8% 98% 0.80% 0.80% Old Line Bank OLBK 1,712, % 1.4% 11.6% 80.3% 86.8% 12.0% 103% 1.28% 1.24% Sonabank SONA 1,142, % % 81.5% 89.9% 9.3% 102% 0.79% 0.8 United Bank UBSI 9,017, % 17.6% 9.7% 59.7% 84.5% 14.9% 87% 1.07% 1.08% WashingtonFirst Bank WFBI 1,999, % 4.9% 14.0% 78.4% 85.9% 13.3% 100% % Auto Loans 1-4 Family Jr. Lien 1-4 Family 1st Lien HELOCs C&I Other CRE Owner-Occ. CRE Multifamily ADC / Construction 0% 2% 5% 4% 18% 18% 15% 1 14% 13% 12% Freedom Bank of Virginia 20% Peer Avg. 27% 30% CEO Craig Underhill noted during a recent conversation with us that FDVA views growing the Commercial and Industrial portfolio as a key priority during 2017 to diversify away from CRE and to penetrate Core Deposit relationships especially in the Government Contractor segment. Government contracting now accounts for about 40% of Demand Deposits and 30% of Money Market accounts. Sufficient capital exists to support Loan growth until at least 2019 in his view and back office support personnel and senior lending staff is in place to grow the company to at least $600 Million. Source: FIG Partners Research, SNL Financial LC 5

6 Price-to-Tangible Book A 5-Year History For FDVA Source: FIG Partners Research, SNL Financial LC s Interactive website. Risks For Investors To Consider: Unexpected and/or rapid changes in interest rates may have significant negative impact on this financial institution s Balance Sheet. Likewise, persistently low interest rates, and/or a flat yield curve may add downward pressure to revenues and the absolute level of NIM-Net Interest Margin. Declines in asset quality due to an economic slowdown in this company s operating footprint may require increased expenses for loan losses which could decrease overall profitability. Further, this may increase Net Charge-Offs, Nonperforming Loans, Other Real Estate Owned (OREO), and Classified Assets. Rules set forth by regulatory agencies could reduce future profitability by eliminating certain revenue items, adding additional expenses, or requiring this company to hold more capital. A similar effect is possible if any new legislation (local, state, or federal) is passed that applies to financial institutions. Any regulatory action or litigation against the company could impact future earnings and also affect the public market perception towards this stock. 6

7 Distribution of Ratings Buy / Outperform Hold / Market- Perform Sell / Underperform % Rated 30.5% 69.5% 0.0% IB Client % in Category 30.8% 16.9% 0.0% Research Report Disclosures This research report is not a recommendation to purchase the subject securities mentioned in this report. At the prior month end, neither nor any of its partners or officers owned more than of the outstanding equity securities of the subject companies. There are no material conflicts of interest of the analyst or at the time of this report. FIG has not been a manager or co-manager of a public offering of subject companies in this report within the last three years. FIG has not received investment banking compensation from subject companies in this report in the last three years. FIG intends to seek investment banking compensation from subject companies in this report in the next three months. Certain companies in this report may be clients of FIG. Neither the analyst nor anyone at FIG serves as an officer, director, or advisory board member of any company in this report. FIG may make a market in the subject securities and may have been making a market in the subject securities at the time of this report s publication (see for our market making list). All analysts are compensated based on a number of factors including the overall profits of which includes investment banking revenues, but no analyst receives any compensation which is based on a specific investment banking service or transaction. To determine price target, our analysts utilize a variety of valuation techniques including but not limited to: peer analysis, absolute P/E, relative P/E, projected P/E, absolute P/B, relative P/B, projected P/B, deposit premium, and a discounted cash flow model. This research report reflects the analyst s actual opinion. No research analyst is subject to the supervision or control of any employee of the member s investment banking department. No employee of the investment banking department has reviewed or approved this report prior to publication. The report has not been approved by the subject company, but may have been reviewed for factual accuracy except for the research summary, research rating and price target. The subject company has not been promised directly or indirectly favorable research, a specific rating or a specific price target nor has the subject company been threatened with a change in research as an inducement for business or compensation. Additional information is available by request. The information contained herein has been prepared from sources and data we believe to be reliable but we make no representation as to its accuracy or completeness. The opinions expressed herein are our own unless otherwise noted and are subject to change without notice. The price and value of the securities mentioned herein will fluctuate; past performance is no guarantee of future results. This report is published solely for informational purposes and should not be construed as an offer to buy or sell, or a solicitation of an offer to buy or sell, any security. The securities discussed herein are not suitable for everyone; each investor should assess his or her own particular financial condition and investment objectives before making any investment decisions. may act as principal for its own account or as agent for both buyer and seller in connection with the purchase or sale of any security discussed herein. Reproduction or redistribution of this report in any form is prohibited except with the written permission of. The author is employed by, a broker-dealer. Data sources for the report are Bloomberg Financial L.P., SNL Financial LC, Stockcharts.com, Thompson Financial and regulatory filings. Equity Rating System as of July 1, 2003 Buy/Outperform Hold/Market-Perform Sell/Underperform FIG expects that total return of the subject stock will outperform the industry benchmark (BIX) over the next 12 months FIG expects that total return of the subject stock will perform inline with the industry benchmark (BIX) over the next 12 months FIG expects that total return of the subject stock will under perform the industry benchmark (BIX) over the next 12 months For purposes of FINRA rule 2711, outperform is classified as a buy, market-perform is a hold and underperform is a sell. The industry benchmark that is used is the S&P Bank Index, referred to as the BIX. 7