Free to Grow?

Free to Grow?

BANKING by Mark Gordon | Managing Editor

There's no such thing as quiet expansion in the heavily regulated - and highly competitive - Gulf Coast banking industry.

Fast growth and early business success usually brings admiration, cheers and maybe even a few backslaps.

But in the case of Bradenton-based Freedom Bank, which doesn't turn two years old for another four months, its speedy success in generating assets and deposits is bringing something else: Scrutiny. It's coming from regulators and potential investors, not to mention the occasional grumbling competitor.

"We've become a more mature bank in just two years," says founder, president and CEO Gerald Anthony. "To some people that sends up red flags."

Anthony knows of what he speaks. The longtime community banker is an accomplished quick-growth artist. He's done it with banks twice before on the Gulf Coast, most recently seven years ago with Bradenton-based Coast Bank of Florida.

Coast's first 20 months mirror what's happened at Freedom: Weed-like asset growth matched against lagging net income and no profits. (See related chart).

Anthony, 64, left Coast in 2004 - long before the bank found itself mired in its current loan debacle that threatens its future, but prior to leading the bank through his signature strategy of growing quickly through relationships and being open to many types of loans and customers.

Business plan upgrades

By mid-summer 2005, the first Freedom branch had opened. And since then, in many areas, the banks' early success is indisputable. Assets grew 140% in 2006, from $88.9 million in 2005 to $215.3 million, and it passed $250 million early in 2007 - $261 million as of March 31 - a significant accomplishment, especially in the community bank-heavy Gulf Coast, where there's stiff competition for every buck and loan.

There have been other examples of Freedom's growth: It's opened five branches in its first 20 months; it's planning to add a third armored truck to its courier fleet; and it's in the process of undergoing major renovations to its 25,000-square-foot headquarters on Cortez Road, an office formerly occupied by SouthTrust and Wachovia branches.

Indeed, the bank has grown so fast Anthony has already rewritten the business plan upward three times, with significant upgrades each time, including going from $80 million to $150 million in assets in the first year.

Anthony, though, isn't deaf to the comments and scuttlebutt about growing too fast. Freedom's growth hasn't translated into profits yet; in 2006 the bank reported a net income loss of $1.01 million, up slightly from $987,000 in 2005. Return on equity and assets also remain slightly negative, although the year-to-year numbers at the end of 2006 were heading in a positive direction.

Regarding regulators, Anthony says state banking examiners will be pouring over Freedom's books soon, part of a standard check they perform with all Sunshine State startups. Nonetheless, Anthony says he's "expecting some different types of scrutiny that we haven't seen before."

Hanging props

Anthony says Freedom is "progressive, not aggressive," more by way of explanation as opposed to a defensive mechanism. The attention-catching growth is due to execution of a simple, smart strategy, says Anthony, as well as his 30 years of experience in the industry.

Anthony's banking career began in 1969 in his native Ohio. By 1989, he had moved to the Gulf Coast, where his first venture was leading a group that founded American Bank, which later became Gold Bank. In 2000, he was behind the group that started Coast.

"I feel I have a good handle for what the market is here," says Anthony, "and what customers need."

That goes for things the customer sees as well as the operations behind the scenes. Externally, Anthony eschews hanging props streaming from a bank branch ceiling and he isn't a fan of the deli-counter style menu boards listing CD rates and mortgage points seen in many bank lobbies.

Like many of his community banking brethren, Anthony realizes he's not going to grow strictly by product offerings - rates and percentages tend to be pretty similar, no matter the bank. So again, just like his fellow bankers, he says it all comes down to the one-on-one relationship with the customer. "Our people are more interested in finding out what a customer needs," Anthony says, "besides what we offer."

Comfort banking

Freedom grew quickly from the start, aided by customers who followed Anthony and other well-known bankers he recruited. One such hire was Mark Williams, an experienced lender in the Sarasota market, to help grow the bank's presence south of Bradenton and its four Manatee County branches. Freedom's growth was also given a boost by national and regional banking consolidations, which forced many customers to seek local comfort banking.

Anthony even concedes the problems at Coast, made public Jan. 19, provided a small boost to Freedom, as some Coast customers moved money out of the bank.

Internally, Anthony says the original intention with Freedom was always to support the customer and asset growth before things got too big. "The plan was to develop the footprint as quickly as possible," he says, "while keeping the bank secure and sound."

It's a challenge faced by many other bankers and entrepreneurs in any business, and at Freedom, Anthony is attacking it proactively. He's already hired two risk management analysts and two IT-gurus, staff a denovo bank normally doesn't bring on so early. The plan, says Anthony, is to have the system in place before the growth becomes to big to handle.

Anthony says the strategy, from approaching customers to minimizing risks in a loan portfolio, has worked in the past, is currently working at Freedom and has the potential to keep on working. The X-factor is execution.

"Our biggest challenge is ourselves," Anthony says. "If we don't execute, we will become our own worst enemy."

'Customer base'

Freedom isn't growing simply to flex its muscles, its founder says, although it will help it to reach some long-term goals. Anthony's original five-year plan was to see the bank become marketable in assets and deposits by 2010. Then, it would have the size and stature to have flexibility in the banking market, making it either a potential buying target or a potential buyer looking to acquire another bank.

In turn, striving for growth breeds more growth, says Anthony, as the bigger the bank gets, the more it has the opportunity to straddle two markets. It can be small enough to stay in the community banking spectrum, but big enough to attract customers who normally bank with national or regional operations.

In pure lending terms, Anthony says that gives the bank the ability to lend $7 million to any one client. Says Anthony: "It allows you to create your own customer base."

Anthony expects to grow that customer base even more over the next year, despite any scrutiny that might come the bank's way. Plans include new branches, new hires and even a possible third round of public financing; the first two offerings brought the bank about $34 million.

"We have a lot on our plate," Anthony says. "You are going to be seeing and hearing more of us."

REVIEW SUMMARY

Business. Freedom Bank, Bradenton

Industry. Banking

Key. Fast growth brings scrutiny from the feds and investors, Freedom Bank executives are finding out.

A history of fast growth

Gerald Anthony was part of a group that co-founded Coast Bank of Florida in 2000, an organization that grew its assets long before its income. The first 20 months at Freedom Bank, which Anthony founded midway through 2005, show similar results to the early going at Coast.

For example, both banks had triple-digit growth in assets, liabilities and equity capital in early year-to-year comparisons. But return on assets, return on equity and net income remained in the negative over the same period of time.

Here's a comparison in some key statistics for each bank's first two years.

FREEDOM BANK 12/31/05 12/31/06 %change

Total assets 89,991 215,839 140%

Total liabilities 74,764 185,001 147%

Equity capital 15,227 30,838 103%

Tier 1 core capital 14,596 30,110 106%

Total interest income 1,912 10,570 453%

Total interest expense 819 5,656 591%

Net income -987 -1,014 -

Performance Ratios

Return on assets -1.75% -0.67%

Return on equity -6.44% -3.62%

COAST BANK OF FLORIDA 12/31/00 12/31/01 %change

Total assets 55,199 112,711 104%

Total liabilities 50,381 102,733 104%

Equity capital 4,818 9,978 107%

Tier 1 core capital 4,826 9,261 92%

Total interest income 1,641 6,087 271%

Total interest expense 1,136 3,652 221%

Net income -1,188 -513 -

Performance Ratios

Return on assets -3.05% -0.60%

Return on equity -23.32% -6.50%

(Dollars in thousands) SOURCE: FDIC

Backed by

the Board

Gerald Anthony has been getting some help in the grow-early-and-often strategy he's implementing at Freedom Bank, and not just from employees.

The bank's founding board of directors was aware of Anthony's penchant for growing assets and deposits at a breakneck pace, and they had watched him do just that at two previous Gulf Coast-based start-ups. Indeed, Anthony's ability to lead a growth strategy was partly why the board - which includes a retired plastic surgeon, a retired auto dealer and a retired university president - wanted him to run Bradenton-based Freedom in the first place, chairman Howard Seider says.

Board member Ed Jennings, who retired as president of Ohio State University and now lives in Bradenton, says the board regularly talks over the strategy, specifically if the bank is growing too fast for its own good. The board is also cognizant of the heightened risks in the current residential construction loan market, says Seider, risks that played a role in the current problems at Coast Bank, which Anthony co-founded in 2000.

Jennings serves on Freedom's loan committee, in addition to the board, and he says loan risk in this area has recently been the elephant in the room. The committee and the board, says Jennings, have always been very specific when looking at factors like overall diversification and each borrowers' credit history.

"It's really about the quality of the loans," says Jennings. "I'm absolutely confident in these loans."

Jennings says he and other directors also have confidence in Anthony's growth strategy.

-Mark Gordon

BY THE NUMBERS

FREEDOM BANK

(Dollars in thousands)

ASSETS AND LIBILITES 12/31/05 12/31/06 %change

Total assets 89,991 215,839 140%

Net loans and leases 65,766 168,891 157%

Total liabilities 74,764 185,001 147%

Equity capital 15,227 30,838 103%

Noncurrent loans and leases 0 642 -

Average assets, year-to-date 56,443 150,274 166%

Insider loans 5,741 412 -93%

Tier 1 (core) capital 14,596 30,110 106%

INCOME AND EXPENSES 12/31/05 12/31/06 %change

Total interest income 1,912 10,570 453%

Total interest expense 819 5,656 591%

Net interest income 1,093 4,914 350%

Provision for loan and lease losses 716 1,289 80%

Total noninterest income 266 497 86%

Total noninterest expense 2,202 5,691 158%

Salaries and employee benefits 987 3,385

Pre-tax net operating income -1,619 -1,569 -

Net income -987 -1,014

PERFORMANCE RATIOS 12/31/05 12/31/06

Net interest margin 2.06% 3.51%

Return on assets -1.75% -0.67%

Return on equity -6.44% -3.62%

Efficiency ratio 162.03% 105.17%

Noncurrent assets plus other

real estate owned to assets 0 0.54%

Core capital (leverage) ratio 20.83% 15.55%

Tier 1 risk-based capital 20.62% 17.34%

Total risk-based capital ratio 21.69% 18.50%