Bank Returns

Bank Returns

banking by Mark Gordon | Managing Editor

The new boss at Freedom Bank comes with a stellar resume and track record. Will it be enough to lead a turnaround?

When David Zuern retired to St. Petersburg in 2004 after a 38-year career in finance that included a stint as the top regulatory officer for Pennsylvania's banks, he didn't fill up the tank in his boat or reach for the golf clubs.

He reached for bank pro-forma statements and began talking to community bankers. A banker's banker, his retirement pursuit was going to be finding some of the best community banks on the Gulf Coast in which to invest.

He made several passive investments in a handful of community startups and de novo banks. He even joined the board of one bank, Community Southern Bank in Lakeland.

But like many retirees before him, the life of leisure didn't take. Four years after moving full-time to Florida, Zuern is back in the game. And his entry point is no early-bird special: In late April, he took the job as vice chairman and chief executive officer of Bradenton-based Freedom Bank, whose co-founder and CEO, Gerry Anthony, had recently joined Zuern in retirement.

Freedom has twice been a leader in Gulf Coast community banking, especially in the Greater Bradenton market. First, the bank, under Anthony's direction, was a fast-growth dynamo, passing $250 million in assets in early 2007, only about 18 months after opening its doors. It also opened five branches in its first 20 months and completely renovated its headquarters on Cortez Road, a former SouthTrust and Wachovia office.

The going was so good that Anthony rewrote the bank's business plan with upward projections three times in its first two years.

Still, the bank has also been something of a local market leader in terms of problems, as the entire banking industry suffers under the weight of the housing market collapse. The fast growth didn't translate to profitability, which is common for a community startup, but other issues have recently surfaced.

For starters, the bank lost nearly $8 million in the first quarter of 2008. And that comes off annual losses each year it has been in operation: the bank reported a net loss of $987,00 in 2005; a loss of $1.01 million in 2006; and a $5.87 million loss in 2007.

What's more, Mark Williams, Freedom's one-time executive vice president under Anthony, sued the bank earlier this year, alleging he was asked to understate any potential loan problems the bank was having. The Manatee Circuit Court case is currently in arbitration and Freedom officials declined to comment on it.

Little surprise then that Zuern, the secretary of banking for Pennsylvania for almost two years while Tom Ridge was the state's governor, has brought a roll-up-the-sleeves frankness to the $300 million asset bank. "We are not going to be growing our loans as fast as we have," he says. "It's a restructuring period at Freedom."

'Not fun'

The restructuring begins, naturally, with dealing with the problem loans that stem from the real estate market collapse. The bank's percentage of noncurrent loans, for example, has just about doubled from March 2007 to this past March, from 4.24% to 8.28%, according to Federal Deposit Insurance Corp. data. Meanwhile, the amount of properties the bank has on its books because of foreclose rose 778% in the same year-over-year time frame, from $432,000 to $3.79 million.

Says Zuern: "The key focus is to deal with the problem loans expeditiously and aggressively to regain asset quality."

In Zuern's first two months at the bank, he has already begun implementing a five-step plan to do just that. In no specific order, the plan includes:

• Taking steps to raise additional capital, through private or institutional sources, in addition to improving the bank's liquidity. Freedom hasn't totally ruled out a sale if the right parameters are met, although Zuern says the bank isn't actively pursuing one, either;

• Evaluating the bank's branch network to eliminate overlapping services. For instance, it recently closed a branch on Cortez Road that was just a few blocks from its renovated headquarters;

• Improving all areas of bank communications, from its relationships with state and federal regulators to being forthright with its employees to taking an active role in community events;

• Working with each individual troubled borrower to find a solution to the loan problems, from outright foreclosure to accepting a deed in lieu of foreclosure. This step includes analyzing all of the bank's loans, even the ones not in trouble, to avoid future problems. "It's not a lot of fun," Zuern says. "It's often painful for everyone involved, bank included."

• Looking for other ways to cut costs.

"Anytime a bank goes from a rapid growth environment to a slower asset growth environment there will be challenges," says Zuern. "[But] We believe that if we do the right things from here, we can put the shareholder values back to where they should be."

Nonetheless, Zuern's banking experience, from his regulatory work to running startups to heading up a division of a large regional bank, brings him to the following conclusion. Says Zuern: "It's the most pervasively difficult banking environment I've seen in 38 years."

A new world

In the beginning of that 38-year banking career, Zuern was working his way up at Marine Bank, a local institution in Erie, Pa. Back then, Zuern became friendly with an attorney and fellow northwest Pennsylvania native who worked in the same building. His new friend's name was Tom Ridge.

It was a friendship that would reshape Zuern's career. He later served as the finance chairman on several of Ridge's seven successful campaigns for U.S. Congress and also worked on his friend's winning Pennsylvania gubernatorial campaigns in 1994 and 1998.

The work led to Zuern's first full-time government job when Ridge named him the state's banking secretary in May 1999. The job was a combination of enforcer and adviser, where Zuern traveled the state and met with many community-banking executives.

Zuern also spent a lot of time in Washington D.C. in that position, dealing with nationwide banking issues. What's more, Zuern led the state's efforts in a few other economic areas, including serving as chairman of the Pennsylvania Housing Finance Agency and sitting on the boards of the state's Industrial Development Authority and its Economic Development Financing Authority.

"I'm really glad I did it," Zuern says. "It gave me a real appreciation of a world I wasn't in."

Zuern's world had been in growing banks, first with Marine Bank and later with PNC, a Pittsburgh-based bank with a large presence in the Northeast and Mid-Atlantic states. By 1999, when Ridge called about the banking secretary job, Zuern had been head of PNC's Northwest Pennsylvania division for several years.

And Zuern returned to the banking world after his short government stint. His charge was to meld two underperforming thrifts into one commercial banking enterprise at Harrisburg, Pa.-based Waypoint Bank. He accomplished that task in less than four years; the bank was sold to Sovereign Bank in a $980-million deal in 2004.

That was the deal that spurred Zuern to retire to St. Petersburg, where he and his wife already owned a home and had spent previous vacations. It was during his community banking research and investments that he met some Freedom board members.

Those directors, including Dr. Howard Seider, the board chairman, approached Zuern after Anthony retired. Zuern says he quickly decided to take the job, although he wasn't necessarily itching to come out of retirement. It also wasn't only to protect his investment in the bank.

Instead, it was the pursuit of a challenge that lured him back. "A challenge like this can be frustrating," says Zuern. "But it can also be exhilarating."

Freedom Bank

(Dollars in thousands)

ASSETS AND LIBILITES YTD 03/31/07 YTD 03/31/08 %change

Total assets 262,569 290,891 10.7%

Net loans and leases 205,450 225,665 9.8%

Total liabilities 232,202 270,500 16.4%

Equity capital 30,267 20,391 -32.6%

Noncurrent loans and leases 8,836 19,899 125%

Average assets, year-to-date 239,204 291,239 21.7%

Insider loans 414 662 59.9%

Tier 1 (core) capital 29,196 16,446 -43.6%

INCOME AND EXPENSES YTD 03/31/07 YTD 03/31/08 %change

Total interest income 4,146 4,225 1.9%

Total interest expense 2,511 3,037 20.9%

Net interest income 1,635 1,188 -27.3%

Provision for loan and lease losses 729 7,462 923%

Total noninterest income 100 71 -29%

Total noninterest expense 1,974 1,742 -11.7%

Salaries and employee benefits 1,095 828 -16.5%

Pre-tax net operating income -968 -7,945 NA

Net income -615 -7,834 NA

PERFORMANCE RATIOS YTD 03/31/07 YTD 03/31/08

Net interest margin 2.95% 1.82%

Return on assets -1.03% -10.76%

Return on equity -8.05% -136.76%

Efficiency ratio 113.78% 138.36%

Noncurrent assets plus other real estate owned to assets 3.53% 8.14%

Core capital (leverage) ratio 12.06% 5.63%

Tier 1 risk-based capital 13.54% 6.46%

Total risk-based capital ratio 14.79% 7.76%

REVIEW SUMMARY

Business. Freedom Bank, Bradenton

Industry. Banking

Key. The bank's new chief executive, David Zuern, is charged with leading the institution through its current loan problems.